Capital Adequacy of Banks in Ghana; Does Liquidity Transformation Matter?

ABSTRACT

Financial intermediation has been the main activity and source of revenue for banks worldwide. However, when it takes the form of liquidity transformation, banks must exercise caution since this could affect their liquidity and solvency levels. On the basis of this, the study investigates the extent to which banks in Ghana transform liquidity and the influence (if any) of liquidity transformation on bank solvency. This study takes into account 20 banks in Ghana and spans for 10 years (2006-2015). It considers banks which have data on at least three out of the five bank level variables captured in the model and had operated in Ghana for a minimum of three years. Dynamic panel models were specified and estimated using the system Generalized Method of Moments estimator. The outcome of this study indicates that banks in Ghana engage in significant liquidity transformation. It also reveals that liquidity transformation is positively associated with improvements in bank solvency, transformed either with or without off-balance sheet activities. The research recommends that banks adjust their capital levels proportionately whenever liquidity transformation rises. This will help avert liquidity risk and improve solvency levels. It also recommends that banks adopt the measures of liquidity transformation used in the study to help them quantify their liquidity transformation activities for management purposes, and that Bank of Ghana should equally apply these measures to enhance its liquidity and solvency regulations