The Relationship Between the Creation of Liquidity, Capital and Profitability of Privatized Banks on the Indonesia Stock Exchange

Sudarto Sudarto, Wiwiek Rabiatul Adawiyah

Abstract


To hedge against liquidity risk, banks can reduce liquidity creation by holding more liquid assets. Since
liquid assets tend to yield lower returns than illiquid assets, the creation of liquidity must be positively
related to bank profitability.
Indonesia's privatized banks from year to year increase the creation of liquidity. In 2014 amounting to Rp.
832 trillion, in 2020 amounting to Rp. 1.799 trillion which accounts for about 42.76 percent of total
assets, an average increase of 13.9 percent higher than the increase in assets (11.83 percent).
Liquidity creation is negatively correlated with profitability, which causes a decrease in profitability. This
relationship allows the bank to have difficulty meeting its short-term obligations (default risk increase)
which allows bank bankruptcy. This is supported by increasing credit risk causing profitability to decline.
Eq_TA is positively correlated with ROA (Retained earnings can strengthen equity) so that banks are
healthier. Which further enhances the financial stability of the country. Therefore, banks with higher
equity-to-asset ratios are relatively more profitable. This result is important for bank authorities to
maintain the capital adequacy ratio.
Keywords: liquidity risk; liquidity creation; liquid assets; illiquid assets; returns; profitability; capital;
credit risk.


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