Financial stability and liquidity risks in the banking sector across the CEMAC region

How does credit from the financial sector and claims on the central government affect banking sector liquidity and financial stability risks? This paper constructs an algorithm, which investigates the impact of domestic credit from the financial sector, bank to capital assets ratio, claims on the central government on banking sector liquidity – a proxy for financial stability. The results show a positive and statistically significant impact of the capital assets ratio on the bank's liquidity of 3.1%. It equally finds that domestic credit and claims on central government hurt bank liquidity, notably of -0.15% and -2.5%, respectively. The study recommends that commercial banks invest in higher-value domestic projects to improve their profitability over the long-run, thereby boosting financial stability. Furthermore, the central bank should make additional liquidity for banks contingent on the amount of credit they provide to the real economy.