Journal of Finance and Economics

Journal of Finance and Economics

ISSN: 2291-4951 (Print)    ISSN: 2291-496X (Online)

Volume 2 (2014), No. 3, Pages 1-15

DOI: 10.12735/jfe.v2i3p01

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The Significance of Bank Capital and Liquidity on Business Cycles: Empirical Evidence from the UK Banking Sector

Isaiah Oino1 

1Greenwich School of Management, London, UK

URL: http://dx.doi.org/10.12735/jfe.v2i3p01

To Cite this Article     Article Views: 664     Downloads: 475  Since January, 2015

Abstract

Stable financial system and liquidity creation are fundamental to economic growth. As a result of recent financial crisis, there has been huge debate on the minimum capital level that is able to absorb credit risk especially during downturn. The Basel III capital proposals have some very useful elements, notably a leverage ratio, a capital buffer and the proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses. Using 10 largest banks in the UK, with the annual data from 2004 to 2013, this research examines the link between bank capital, liquidity and business cycle. Employing both dynamic and static model which is devoid other previous work, the result shows that adequate capital level will mitigate the extent of the financial shocks. The positive association between loan to deposit and changes in the gross domestic product implies that credit extension falls as the economy contract.

JEL Classifications: G2, F3

Keywords: business cycle; liquidity; solvency; capital

To Cite this Article: Oino, I. (2014). The significance of bank capital and liquidity on business cycles: Empirical evidence from the UK banking sector. Journal of Finance and Economics, 2(3), 1-15. http://dx.doi.org/10.12735/jfe.v2i3p01

Copyright © Isaiah Oino

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This article is published under license to Science and Education Centre of North America. This is an Open Access article distributed under the terms of the Creative Commons Attribution 4.0 International License.

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The Significance of Bank Capital and Liquidity on Business Cycles: Empirical Evidence from the UK Banking Sector
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