Factors associated with the structural liquidity of banks in Brazil

Abstract

ABSTRACT This study aimed to identify the relationship between the Structural Liquidity Index (SLI) and macroeconomic variables, bank characteristics, and the validity period of the Basel III Agreement. Although the academic discussion on bank liquidity essentially addresses short-term issues, monitoring long-term liquidity helps assess any excessive dependency of banks on unstable resources, thus contributing to mitigating the risks of systemic liquidity crises such as that of 2008. As it provides evidence of the relationship between the SLI and the selected explanatory variables, the study can be included in the context of the discussions involving the Basel III Agreement, which establishes the implementation of the long-term liquidity index regulatory requirement as of 2018. The model was formulated based on fourteen research hypotheses, tested using panel data regressions estimated via pooled ordinary least squares, least squares with fixed effects, and two-stage least squares with fixed effects. The dependent variable was constructed based on the accounting data of 184 conglomerates and individual financial institutions operating in the country between June 2002 and December 2014. The SLI presented a positive relationship with changes in the exchange rate, international reserves, and reserve requirements, as well as with the profitability, size, and main specialization of the institution. On the other hand, we found a negative relationship between the SLI and the basic interest rate, country risk, balance of trade, validity period of the Basel III Agreement, type of equity control (private vs. government), and the bank being publicly listed on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBovespa) or privately held. The validation of the relationships between these explanatory variables and the SLI provides a broader understanding of the risks to which financial institutions are exposed, contributing to the preventive analysis of bank liquidity risk - an antecedent indicator of financial crises, diminished confidence, and economic instability.