Impact of Government Borrowing on Bank Liquidity Crisis: An Econometric Analysis
Keywords:
Liquidity position (LP), Investment (INV), Classified loan (CL), Outstanding amount of letter of credit (OULC), Net government borrowing (NGB), Cash reserve ratio (CRR), M2, Rescheduling, Loan against trust receipt (LTR)Abstract
This paper attempts to reveal the ultimate determinants affecting the
recent liquidity position of commercial banks in Bangladesh. The whole
scenario is presented through focusing on the various elements affecting the
liquidity position in commercial banks over a period of time. This liquidity
position of commercial banks is affected by many macro economic variables
such as savings and investment, distribution of credit, interest rates and
economic growth. The models developed in this paper divulge that some of the
determinants such as share price Index, overall investment position of
commercial banks, M2 Currency, overall classified loans of commercial banks
and outstanding amount of L/C significantly affect the liquidity position of
commercial banks in Bangladesh. Although net government borrowing from
banking sector also affects the liquidity position of commercial banks through
creating crowding-out effect for private investors, the models mentioned in this
study reveal that net government borrowing is not individually significant in
explaining liquidity position of commercial banks rather this net government
borrowing along with other variables is jointly significant in explaining liquidity
position. As a corollary, this paper examines whether the so-called Government
borrowing in recent years may cause the liquidity crisis in commercial banks of
Bangladesh.
