Is there a threshold effect in the liquidity risk–non‐performing loans relationship? A PSTR approach for MENA banks

This study analyzes the nonlinear relationship between liquidity risk and nonperforming loans (NPLs) for a sample of MENA banks over the period 2004–2017. Results of the Panel Smooth Transition Regression model indicate that there is a threshold effect in the liquidity risk and NPLs relationship. Mo...

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Bibliographic Details
Published in:International journal of finance and economics 2022-04, Vol.27 (2), p.1886-1898
Main Authors: Boussaada, Rim, Hakimi, Abdelaziz, Karmani, Majdi
Format: Article
Language:English
Subjects:
Bank liquidity
Inflation
liquidity risk
MENA banks
Nonperforming loans
PSTR
Risk exposure
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Summary:This study analyzes the nonlinear relationship between liquidity risk and nonperforming loans (NPLs) for a sample of MENA banks over the period 2004–2017. Results of the Panel Smooth Transition Regression model indicate that there is a threshold effect in the liquidity risk and NPLs relationship. More specifically, we found that above the threshold of 73.10% for loans to deposits ratio, liquidity risk significantly increases the level of NPLs. However, below the threshold of 87.61% for liquid assets to deposits and short‐term funding ratio, the NPLs are also significantly and positively correlated with the liquidity risk. Furthermore, we found that NPLs are more sensitive to bank performance, bank capital, bank size, international financial crisis, and the inflation rate. However, no significant effect was found for the impact of ownership concentration and board characteristics either below or above the thresholds.
ISSN:1076-9307
1099-1158
DOI:10.1002/ijfe.2248