Technical Efficiency of Bank Liquidity Creation For Malaysian Commercial Banks From 2011 to 2018

Abstract

One of the most important roles of banks in the economy is the provision to create liquidity. Bank liquidity creation incorporates all on- and/or off-balance sheet financial activities to foster long-term investments that contributes to growth. This study focused on measuring technical efficiency of bank liquidity creation for Malaysian commercial banks based on the on-balance sheet financial activities. Liquidity creation was measured using the ‘catnonfat’ approach introduced by Berger and Bouwmann (2009). In the ‘catnonfat’ approach, all onbalance sheet items of each bank evaluated in this study were classified as: liquid, semi-liquid and illiquid to obtain the total liquidity creation for the respective year. The sample data in this study covered 22 commercial banks in the Malaysian banking sector from 2011 to 2018. The banks in this study were split into: large, medium and small sizes. It was observed that large banks were the greatest contributors to liquidity creation in the economy. They were followed by medium-sized banks which comprised many banks and the lowest contributors to liquidity creation were small-sized banks. Bank technical efficiency measurement was performed by employing non-parametric Data Envelopment Analysis (DEA) in relation to the size of the banks. DEA is the common approach for efficiency evaluation in the banking sector as the method is able to accommodate a multiple inputs and outputs. Therefore, the efficiency of decision-making unit (DM)U can be measured and the levels of efficiency of different DMUs can be compared. It is observed that medium sized banks were the most efficient in creating liquidity throughout the period. Small banks averagely less efficient than large and medium banks in creating liquidity. Since this study only measured liquidity creation from the on-balance sheet financial activities, further research is suggested to employ another approach that inclusive of the off-balance sheet to examine the overall interplay between banks and growth.