The Effect of Bank-Specific Variables on NSFR of Malaysian Banks

Abstract

The recent 2008 world financial crisis show how the liquidity problem in a particular region can easily affects the whole world. Following the crisis, both supervisory and regulatory bodies recommended various measures that will makes the bank’s liquidity more vibrant. Liquidity crisis in a bank will undermines the performance, while non-performance of a bank will lead to failure. Studies were conducted on the factors affecting the liquidity risk in banks previously. The factors examine includes internal, external and ownerships; some studies indicated that before the 2008 crisis, liquidity risks in banks was not taken as one of the major priority by banks. At the outbreak of the crisis it was realized that liquidity is one of the major cause.; Thus, Basel committee on banking supervision (BCBS) come up with suggestions and structures that will makes the banks liquidity more powerful among which NSFR is included. it is noticed that, after the crisis, banks performance was improved, although some studies indicated that still the performance of some banks failed due to the lack of strong liquidity. This study uses secondary data from Fitch connect databases to evaluate the internal variables and ownership factors that determines the bank’s Liquidity risk. The new liquidity rule (NSFR) act as dependent variable. The findings of the study through Panel corrected standard error (PCSE) model indicated that, all the banks in Malaysia over complied with newly introduced NSFR, the study further finds that, only capital and non-interest income are contributing factor to this over compliance. The implications of this is that maintaining an excessive liquid asset tend to lower the bank’s profitability, thus it is recommended that the Banks need to find other ways to invest their excess liquid assets in order to be more profitable.