Volume 29 Number 4, 2024

The Effect of Banking Market Competition on Bank Liquidity Creation and The Moderating Role
of Bank Income Diversification: Evidence from European Countries

Halim Dabbou ^a, Riadh Ghenima ^b,*, Asma Gaaliche ^c
a Université de Hearst – Campus de Timmins, Ontario, Canada
halim_dabbou@uhearst.ca
^b,* Arab East Colleges, Riyadh, KSA
riadh.ghenima@isgs.rnu.tn
^c ISG Sousse, Université de Sousse, Tunisia
gaalicheasma36@gmail.com

ABSTRACT

This study examines the effect of banking market competition on bank liquidity creation and investigates how this effect potentially varies with the degree of bank income diversification. The empirical evidence is based on an international quantitative analysis that used data on 81 European commercial banks from 2006 to 2015. The results show that banks’ aggregate on- and off-balance-sheet liquidity creation increases when banking market competition rises. This positive effect diminishes with high levels of bank income diversification. If we believe that the level of liquidity risk in the European market is already excessive, diversification can be considered a “buffer” against the harmful effects of competition. In a highly competitive banking market, bank managers should place more emphasis on the diversification of banking income to avoid competition-induced excess liquidity creation, which can increase the likelihood of failures.

JEL Classifications: G21

Keywords: bank liquidity creation, banking market competition, bank income diversification

Cite this article: 

Dabbou, H., Ghenima, R., Gaaliche, A., 2024, The Effect of Banking Market Competition on Bank Liquidity Creation and The Moderating Role of Bank Income Diversification: Evidence from European Countries, International Journal of Business, 29(4), 002. https://doi.org/10.55802/IJB.029(4).002