Determinants of bank liquidity in the countries of the West African Economic and Monetary Union (WAEMU)

Abstract

Purpose : The aim of this article is to identify the factors driving bank liquidity in the countries of the West African Economic and Monetary Union, based on a sample of 84 banks over the period from 2006 to 2020.

Design/methodology/approach : To achieve this, the dynamic ARDL model was adopted. Two liquidity ratios were calculated. The first (RL1) measures the share of loans in total assets, while the second (RL2) is obtained by dividing total loans by total deposits.

Findings : Cointegration tests by Kao (1999) and Pédroni (2004) revealed the existence of a long-term relationship between liquidity ratios and their determinants. In addition, the estimates showed that GDP growth rate and bank size have a positive and significant effect on LR1, while the impact of the interbank market rate was negative and significant. On the other hand, a positive and significant effect of the money market rate and bank size on LR2 is observed by both the PMG and DFE estimators. On the other hand, the interbank market rate exerts a negative and significant influence on LR2.

Originality/value : To this end, the monetary authorities should initiate incentives to enable secondary banks to possess the liquidity they would have wished for. In addition, we advocate limited recourse by governments to banks to finance their deficits.

Keywords: banking liquidity, ARDL, panel data, WAEMU.

JEL classification : C33, G21, H51.

DOI : https://doi.org/10.18559/RIELF.2023.2.5