Recapitalization and Its Impact on Liquidity Position of Commercial Bank: Evidence from Nepal

Ananta Raj Kafe, Bidush Nepal, Anuj Acharya, Laxman Tandan
International Journal of Finance, Insurance and Risk Management, Volume 12, Issue 4, 47-62, 2022
DOI: 10.35808/ijfirm/334


Purpose: This paper intends to analyze the impact of recapitalization on liquidity position spanning 10 years of monthly time series data from commercial banks in Nepal from July 2012 to April 2022, including the 5 years preceding and following the recapitalization period. Design/Methodology/Approach: The paper examines the relationship between recapitalization and liquidity among commercial banks in Nepal using the Ordinary Least Squares method. The independent variable in the analysis is recapitalization, as measured by the growth in total capital of commercial banks, while the dependent variable is liquidity, as measured by the CD ratio. The study also controls for other factors, including the interest rate of loans, interbank rate, and growth in total assets of commercial banks, and includes a dummy variable for policy changes on capital and CD ratio. Findings: The results of this study demonstrate that recapitalization is positively associated with banks' risk-taking capacity and lending ability, and this relationship is supported by trends observed in Nepal. The study also finds that lending has increased in Nepal due to both the impact of recapitalization and the COVID-19 pandemic. Practical implications: This paper provides valuable insights for economic development, with findings on the impact of recapitalization on liquidity that can be used by banks, financial institutions, and regulators for policy-making and financial stability. Originality value: This research fills a gap in the existing literature by examining the impact of recapitalization on the liquidity of commercial banks, a topic that has not been previously explored in Nepal. It is necessary to investigate this relationship in order to understand how recapitalization affects liquidity.

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