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
