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Net stable funding ratio and profit efficiency of commercial banks in the US

Le, Minh and Hoang, Vincent and Wilson, Clevo and Managi, Shunsuke (2019): Net stable funding ratio and profit efficiency of commercial banks in the US. Published in: Economic Analysis and Policy , Vol. 67, (20 May 2020): pp. 55-66.

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The net stable funding ratio (NSFR) is introduced under Basel III to promote financial stability. Under this new regulation, individual financial institutions are required to maintain a sustainable funding structure; hence this new universal requirement is expected to affect bank operation. In this paper, we provide one of the first empirical examinations of the non-linear relationship between NSFR and profit (in)efficiency for commercial banks using two data sets from Bankscope (for years from 2000 to 2015) and Federal Financial Institutions Examination Council call reports (2000-2013 period). Our results suggest that modest intensification in liquidity helps to reduce bank profit inefficiency (i.e. increase efficiency) but too much liquidity enlargement could increase the inefficiency. This result is consistent with a trade-off hypothesis on the non-linear relationship between liquidity and bank performance.

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