Liquidity in the Albanian Banking System

Abstract

Liquidity is a factor key and decisive in the performance of banks and the success of the economy in general. Along the recent recent financial crisis, the contraction in lending due to banks' failure to effectively manage liquidity risk has increased the importance of monitoring and regulating Bank of Albania's bank's liquidity through the implementation of the Basel rules. Proper understanding of macroeconomic factors is essential in achieving the right balance to absorb the chances and threats that come from a complex economic environment. The study studies the effects of macroeconomic conditions on the Albanian liquidity bank's liquidity level for six second level banks for a period of ten years from 2006 to 2015. Studies show that macroeconomic factors such as GDP growth, inflation, unemployment rate, government budget deficit, tax rates, and problem loans have a direct impact on bank liquidity. The factors affecting liquidity are related to external macroeconomic factors and internal factors related to banks specifically including an analysis of their direct impact on banks liquidity ratios. The methodology used in the study is quantitative by analyzing the factors, it is intended to detect and measure their impact on the liquidity of the banking system. The study expands existing liquidity literature by determining the role of macroeconomic variables, besides the traditional specific firm variables, as important determinants of bank liquidity.