An Analysis of Liquidity Measures and Relative Bank Profitability
Akron Business and Economic Review, Vol. 16, No. 4, pp. 37-43, Winter 1985
8 Pages Posted: 7 Jun 2015 Last revised: 28 Jul 2015
Date Written: July 27, 2015
Abstract
This study reports the results of a longitudinal analysis of the nature of the association between selected bank liquidity measures and relative profitability, with emphasis on high-performance banks. Liquidity is a major component variable in bank financial management.
Conceptually, every decision should be considered for its impact on the maximization of shareholder wealth. However, in a world of uncertainty, regulation, and limited action/reaction time, it is not to possible to follow the conceptually correct approach for the multitude of decisions bankers face. One practical approach to the complex, interactive nature of bank decisions is to disaggregate this system of interrelationships into key variables for daily financial management: (1) spread ("net interest margin") management , (2) overhead expense control, (3) liquidity management, and (4) capital management. Both liquidity and capital management are related to the risk component of bank financial management, while the other two variables are to the income component.
Because this study analyzes the nature of the association between selected liquidity measures and relative bank profitability, it takes as given that liquidity management is important in an absolute sense to maximization of shareholder wealth in the banks. The analysis is carried out longitudinally for the years 1976-1980 on large U. S. commercial banks with both domestic and foreign operations. While it is expected these banks are relatively sophisticated liquidity managers, any differences in levels of profits should reflect differences in decision making, including liquidity management.
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