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Two central roles performed by banks, according to the modern theory of financial intermediation, are liquidity creation and risk transformation, making the banking sector a highly regulated one. The Ghanaian banking sector over the past two decades has been undergoing major reforms. One of such reforms is the issue of bank recapitalisation. It is against this background that the study sought to investigate the relationship that exists between bank regulatory capital and liquidity creation in Ghana, using banks’ ownership structure as a moderating variable.
To attain the above objective, the study made use of an unbalanced data set of 17 banks over a ten-year period spanning 2007 to 2016. Based on the Hausman Specification test, the random effects model was employed to estimate the panel regression model specified. Findings of the study confirmed that Ghanaian banks do not create much liquidity within the economy. Also, the study confirmed that the impact of banks’ regulatory capital on liquidity creation is influenced by the bank’s ownership structure.
The study recommended that the Central Bank puts in place a local Guarantee Scheme to help build relationships between the banks and potential borrowers. This scheme would help the government to allocate funds to productive but risky sectors within the economy thus, aiding liquidity creation. Also, the Bank of Ghana could liaise with the appropriate authorities, to consider granting tax incentives to banks who are willing to lend a certain percentage of available funds to earmarked productive sectors. This incentive would serve as a source of motivation and encouragement for banks willing to take on the additional risk of lending to such risky sectors.
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