Journal of Economics and Development Studies

Banking Regulation and Liquidity Risk: The Role of the Financial Market in the WAEMU Region
PRAO Yao Séraphin, ANZARA Xavier Fabrice Méa

Abstract
The objective of this paper is to examine the role of the financial market in the relationship between banking regulation and liquidity risk. The study focuses on WAEMU countries except for Guinea Bissau and covers the period from 1996 to 2018. Using a smooth transition panel model (PSTR), we show that there is a non-linear relationship between banking regulation and liquidity risk, taking into account the financial market, characterized by a smooth transition between two regimes. Indeed, we show that the effectiveness of bank regulation is reduced above a market capitalization threshold of 24.93%. More precisely, bank regulation reduces liquidity risk below the threshold while the effect above the threshold is positive, but not significant. This result suggests that the development of the stock market may reduce the effectiveness of existing prudential regulations and calls for increased supervision of market activities to ensure the sustainability of the banking system in the union.

Full Text: PDF     DOI: 10.15640/jeds.v11n1a3