Regulatory Capital Effects On The Liquidity Risk Of Indigenous Ghanaian Banks

ABSTRACT

The study investigates the regulatory capital effects on the liquidity risk of indigenous Ghanaian banks. The proxy for regulatory capital is the ratio of the sum of tier 1 and tier 2 capital to total assets and the proxy for liquidity risk is 1/ (liquid assets/Total assets). To achieve set objectives of the study, a Pearson correlation was run along with scatter plots to investigate the relationship between the variables of the study for five local commercial banks in Ghana covering the duration 2010 to 2017. The outcome of the correlation coefficient and the various graphs of these banks from 2010 to 2017 show that regulatory capital has an indirect relationship with liquidity risk of the local commercial banks. Hence, a rise in the regulatory capital will lead to a decline in the liquidity risk of the banks and a decline in the regulatory capital will increase the liquidity risk of the banks. The result also showed that regulatory capital has a direct or positive correlation with profitability of the various banks used in the study from 2010 to 2017. This is evident in the results of the scatter plots and the correlation coefficients between the regulatory capital and the profitability measures. This implies, a rise in the regulatory capital will increase the profitability of these banks whereas a decline in the regulatory capital, will lead to a fall in the profit levels of these banks. On the outcome of these results, the study recommends the managers of the various commercial banks put in much effort to have adequate regulatory capital required of them because it tends to have a positive effect on profits but negative on liquidity risk.