Bank Liquidity Risk and Bank Credit Risk: Implication on Bank Stability in Ghana

Bank sector crisis across the globe is largely blamed on the joint effort of bank liquidity and bank credit risks. And so, the twin concepts of liquidity and credit risks have come under keen academic scrutiny, especially in investment finance. Contributing to extant literature on these developments, secondary data were obtained from the websites of nine banks in Ghana, spanning 2008 to 2018, to determine how liquidity and credit risks separately and interactively impact bank stability in Ghana. Analysis of data was done using a panel regression through the fixed effects model after running the Hausman Test. The study confirms an inverse liquidity risk-bank stability relationship, emphasising the need to channel idle funds into interest earning securities to consolidate bank profits. Although a further revelation suggests an insignificant negative relationship between credit risk and bank stability, it re-echoes the need to implement policy recommendations made by the Banks and Specialised Deposit-Taking Institutions’ ACT 2016 (ACT 930), section 62 of Ghana, on the threshold to lend funds to clients. Bank-size-stability relationship was positive. Increasing bank size through establishing more branches nationwide is encouraged but to a precautionary level since banks tend to suffer diseconomies of large scale operations due to unregulated expansion. There is the need to observe the Basel III provisions on maintenance of a 30-day optimum liquidity threshold of up to 100% and above. Besides, banks should tighten up their credit requirements and also ensure loan repayments history is monitored to benefit clients who are in good standing.