Determinants of Liquidity Creation in Banking Sector: Evidence from Türkiye

Date

2025-5

Author

Sel Duman, Tuğba

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This dissertation examines the key determinants of liquidity creation in the Turkish banking sector, focusing on capital and digitalization. According to financial intermediation theory, banks generate liquidity by serving as intermediaries between borrowers and lenders, collecting deposits and allocating credit. The study employs a dynamic panel data framework, accounting for unobserved common factors. A notable contribution of this research is the application of a two-step instrumental variables approach and principal component analysis to address cross-sectional dependency. It also explores both on-balance sheet and off-balance sheet dimensions of liquidity creation, a largely overlooked area in previous research on the Turkish banking sector. The findings reveal that while higher capital ratios are essential for financial stability, excessive capital can reduce banks' capacity for liquidity creation, particularly when focusing on on-balance sheet positions. This underscores the challenge regulators face in balancing financial stability with the need for liquidity creation to foster economic recovery. Additionally, the study finds that digitalization within banks positively influences on-balance sheet liquidity creation. However, the effect is less significant when considering both on- and off-balance sheet positions, suggesting that digitalization does not affect the amount of transactions in off-balance sheet accounts. Furthermore, the research highlights a negative impact of digitalization across the broader financial system on liquidity creation, emphasizing the need for banks to invest in digital technologies to maintain competitiveness and sustain liquidity creation.

Subject Keywords

Liquidity creation, Capital, Digitalization, Unobserved common factor, Two step instrumental variable approach

URI

https://hdl.handle.net/11511/114541

Collections

Graduate School of Social Sciences, Thesis