Liquidity and the business cycle: Empirical evidence from the Greek banking sector

In the aftermath of the global financial turmoil the negative market sentiment and the challenging macroeconomic environment in Greece have severely affected the banking sector, which faces funding and liquidity challenges, deteriorating asset quality, and weakening profitability. This paper aims to investigate how banks’ liquidity interacted with solvency and the business cycle during the period 2004-2010. To this end a panel of 17 Greek banks is utilized which, in conjunction with cointegrating techniques and one-way static and dynamic panel models, explores the presence and the strength of the relationship between banks’ liquidity and the business cycle, while allowing for the role of banks’ solvency. Addressing the liquidity risk of the Greek banking sector and the liquidity-solvency nexus remains largely an uncharted area. The results generated provide clear-cut evidence on the linkages between banks’ market liquidity and the business cycle, as reflected in the real GDP and the effective exchange rate. Yet the results display a transmission channel that runs from banks’ solvency to liquidity and from country risk to bank risk

‘PUTTING THE HORSE BEFORE THE CART’: A PRE-CRISIS PANEL DATA INVESTIGATION OF GREEK BANK’S CREDIT GROWTH

The economic crisis that was ignited in 2009 has ushered in an era of economic stagnation and social misery across much of the EU region that could last for a generation or more. As a result, governments in the recession-stricken Eurozone are struggling to find a viable way out of what is perceived to be the worst economic turmoil since the establishment of the EU. In Greece, the rippling effects of the crisis manifested themselves in a sovereign debt crisis accompanied by practically a collapse of its banking sector. This paper by using panel data analysis purports to explore and effectively shed some light on the key factors that determined the lending behavior of the banking sector in the pre-crisis period. To the best of our knowledge, there are hardly any empirical studies conducted on the role of banks over the period 2004-2010. The evidence yielded, relates credit growth to deposit growth and rising housing prices as well as banks’ capital strength. In so far as the business cycle affects lending growth, our results confirm that an ever increasing public debt results in curtailed lending while rising real private consumption kept Greek lenders’ volumes at high levels. Given the current banking sector restructuring that is taking place in Greece the evidence that is generated can be invaluable as it suggests alternative channels through which the battered banking sector could resume its main intermediation role