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Funding Liquidity and Risk Taking Behavior in Southeast Asian Banks

ABSTRACT This research investigates the effect of funding liquidity on bank risk taking behavior. Some previous studies in developed countries have found that banks with higher deposit tend to be more aggressive in taking risks, because excess liquidity can reduce profitability and the existence of deposit insurance schemes. However, banks in developing countries tend to hold higher liquidity due to limited interbank money market infrastructure and low diversification of financial instruments. Using data from four developing countries in Southeast Asia from 2002 to 2016, this study found that in contrast to developed countries, banks with lower liquidity risk indicated by higher deposit ratios tend to take lower risks. These results are consistent for the two risk variables used, such as risk-weighted assets, and loan loss provision. The same results are also found after incorporating elements of bank characteristics and macroeconomic factors.