Macroeconomic and Bank-Specific Factors Affecting Bank Liquidity in South Africa: An MSM-VAR Approach

Dumisani Pamba

doi:10.37075/FABA.2025.1.05

Authors

Dumisani Pamba School of Accounting, Economics and Finance, University of KwaZulu-Natal, South Africa https://orcid.org/0000-0002-1911-5671

DOI:

https://doi.org/10.37075/FABA.2025.1.05

Keywords:

Bank Liquidity, Macroeconomic Factors, Bank-Specific Factors, MSM-VAR

Abstract

Purpose: The study aims to determine if macroeconomic and bank-specific factors affect bank liquidity differently under different regimes in South Africa.

Design/Methodology/Approach: This research used the Markov Switching Mean Vector Autoregressive (MSM-VAR) approach from 2000Q1 to 2021Q4. The study employed a two-regime model, with regime one indicating low liquidity volatility and regime two indicating high liquidity volatility.

Findings: The findings show that macroeconomic and bank-specific factors react differently to liquidity based on market conditions. GDP growth has positive effects on bank liquidity in both regimes, while exchange rate risk, credit risk, and bank return on equity have negative effects. Inflation has a negative impact on liquidity in regime one and a positive impact in regime two. Bank size has positive effects on liquidity in regime one and negative effects in regime two.

Practical Implications: The study reveals the interplay between macroeconomic and bank-specific factors in shaping bank liquidity, providing insights for policymakers, bank management, and investors to respond to liquidity dynamics during economic fluctuations.

Originality/Value: The MSM-VAR approach analyzes South African banking sector liquidity dynamics, providing insights for policymakers, financial institutions, and investors to improve liquidity management strategies.

Paper Type: Research Paper.

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