Content area
Full Text
1. Introduction
The 2007–2008 global financial crisis (GFC) highlights the significance of liquidity management for banks. It began in the form of fragility in wholesale bank funding markets, creating an acute liquidity crisis for banks (Allen and Gale, 2017; Álvarez et al., 2019; Jobst, 2014), which rapidly became systemic, spilling over to the real economy to trigger the GFC (Shleifer and Vishny, 2010). In response to the crisis, Basel Committee on Banking Supervision (BCBS) introduced Basel III accord in year 2010 to enhance the resilience of banks and to improve the soundness of bank liquidity management (Chan and Worth, 2011).
Following the crisis, extant literature has focused on the assessment of either the expected effects of new regulatory liquidity requirements or the determinants of bank liquidity. However, studies on the management of bank liquidity holdings and speed of liquidity adjustment are very limited. Van den End and Tabbae (2012) addressed the adjustment of Dutch banks’ balance sheet items; DeYoung and Jang (2016) examined how active the US banks manage their liquidity; DeYoung et al. (2018) and Fan et al. (2022) investigated the effect of negative capital shocks and bank deregulation on liquidity speed of adjustment (SOA), respectively. All the mentioned studies examined SOA in conventional banking markets. Although conventional banks (CBs) and Islamic banks (IBs) have divergent assets and liability mix due to their differences in risk-profit sharing and revenue creation, they are both exposed to liquidity risk. Yet, to the best of the authors’ knowledge, no study has investigated liquidity target ratios and adjustment speeds for IBs and how liquidity behaviour would be affected by the scarcity of liquidity management instruments. Therefore, it is worthwhile to illuminate this uncharted area for three reasons: Firstly, both types of banks are now subjected to the Basel III liquidity requirements. Secondly, Liquidity SOA is essential for both IBs and CBs due to its implication on the emergence of systemic bank liquidity crisis (Ly et al., 2017). Thirdly, the challenges of liquidity management in IBs differ from that of CBs due to the former’s Shariah-compliant modes of operations and non-participation in interest-based and speculative conventional money markets (Ibrahim, 2016; Mohammad et al., 2020).
IBs require an effective liquidity management system to mitigate liquidity risk and...