The effect of liquidity risk and credit risk on bank performance: An application on commercial banks in Turkey

In this study, the effect of liquidity risk and credit risk on the financial performance of banks is investigated by panel data analysis. In the scope of the analysis, it is utilized financial data of 27 commercial banks operating in Turkish banking sector between the 2003-2017 years. Four different financial performance measures are used for the analyze. These are return on assets (ROA), return on equity (ROE), net interest margin (NIM) and non-interest income (NII), respectively. In addition, liquidity risk is measured in terms of inverse of liquidity ratio and liquidity gap, and credit risk is measured in terms of non-performing loans and provision for loan losses. According to the results of fixed effect panel data analysis, liquidity risk is more important than credit risk in explaining the change in the financial performance of commercial banks. In addition, the results of the analysis indicate that the interaction of liquidity risk and credit risk variables on bank's financial performance is generally negative. In other words, the increase in credit risk reduces the positive impact of liquidity risk on financial performance.