Determinants of Banks Liquidity: Empirical Evidence on Turkish Banks

The significance of holding an optimal level of liquidity has become prominent following the eruption of the global financial crisis. Hence, the main objective of this study is to identify the determinants of conventional banks’ liquidity in Turkey. This study used the financial data of 21 Turkish banks over the period of 2006-2013, and employed two liquidity ratios i.e. the ratio of liquid assets to customer deposits and short term funding (first ratio), and the ratio of liquid assets to total deposits (second ratio). Bank specific, macroeconomic variables, and the realisation of the global financial crisis were analysed by performing panel random effect regression. The results of the study suggested that only bank capitalisation has positive and statistically significant impact on both liquidity ratios, while loan loss reserve ratio has positive and statistically significant impact on the first ratio, and bank size has negative and statistically significant impact on the same ratio. On the other hand, bank profitability has negative and statistically significant impact on the second liquidity ratio. The results of both regression tests revealed that macroeconomic indicators and the crisis dummy variable have non-significant relations with both liquidity ratios. Keywords: liquidity determinants, Turkish conventional banks, panel random effect, bank specific variables, macroeconomic variables, financial crisis.