according to the agreement. This ability of the bank to repay its liabilities when they come
due is known as funding liquidity. The stock liquidity of the bank depends on its
performance which ultimately depends on liquidity creation and funding liquidity. The ease
with which an asset can be bought or sold without a signicant change in its price is known
as the stock liquidity.
Many studies have been conducted regarding bank liquidity, but most of them explore
only one type of liquidity. Most of the studies regarding funding liquidity are theoretical in
nature, and only a few provide the empirical evidence (Diamond and Dybvig, 1983;Strahan,
2008;Zhang et al., 2013;Drehmann and Nikolaou, 2013;Bonner et al., 2015;Fall and Viviani,
2015). Several of the recent studies regarding liquidity creation measure the amount of
liquidity created by banks and investigate its relationship with capital (Deep and Schaefer,
2004;Berger and Bouwman, 2009;Hackethal et al., 2010;Loutskina, 2011;Lei and Song,
2013;Horvath et al., 2014). There are numerous studies regarding stock liquidity, but most of
them analyze the stock liquidity of non-nancial rms (Chordia et al., 2000;Stange and
Kaserer, 2008;Udomsirikul et al., 2011;Chatterjee, 2015). The studies which explore the
relationship between two or three different kinds of bank liquidity are rare (Brunnermeier
and Pedersen, 2009;Nikolaou, 2009).
This study bridges the gaps in existing literature in many ways. First of all, it eliminates
the confusion regarding the concept of bank liquidity by discussing three different kinds of
bank liquidity separately. Second, it extends literature to a new dimension by providing
empirical evidence regarding the relationship between three different kinds of bank
liquidity. Third, it studies liquidity of banks from emerging economies. A lot of research has
been conducted regarding bank liquidity of developed countries, but studies regarding
developing countries are few. This study is based on banks of Brazil, Russia, India, China
and South Africa, commonly known as BRICS countries, because the banks in these
countries fulll most of the credit demand compared with nancial markets, which play a
stronger role of nancial intermediation in developed countries. Another reason to study the
bank liquidity of these nations is that their economies are in transition and they are expected
economic powers of future. Fourth, the ndings suggest that in the case of publicly traded
banks, capital is not the only factor which affects liquidity creation rather uctuations in
stock liquidity also affects liquidity creation, which ultimately affect funding liquidity. Fifth,
it shows that there is a chain of reaction from stock liquidity to liquidity creation to funding
liquidity. Lastly, it guides us that in case of emerging nations, stock liquidity of banks is
independent of other two types of liquidity.
Rest of the paper is as follow. Section 2 describes relevant existing literature.
Methodology and regression framework is explained in Section 3. Section 4 reports results,
and Section 5 contains the conclusion.
2. Literature review
Our research relates three different strands of literature:
(1) the theories which focus on funding liquidity;
(2) studies regarding calculation of liquidity creation and exploring its relationship
with capital; and
(3) theories related to stock liquidity.
Some of the most relevant studies have been discussed below.