Title: Internecine interrelations among liquidity risk, market risk and credit risk in Indian banking system

Authors: Satya Krishna Sharma Raavinuthala; Girish Jain; Pratap Chandra Biswal

Addresses: Birla Institute of Management Technology, Knowledge Park-II, Greater Noida-201306, India ' Birla Institute of Management Technology, Knowledge Park-II, Greater Noida-201306, India ' Management Development Institute Gurgaon, Mehrauli Road, Sukhrali, Gurugram-122007, India

Abstract: Events like the 2008 financial crisis have highlighted the need to consider the complicated interrelations between liquidity risk, credit risk, and market risk for better and integrated financial risk management of banks. This work uses auto regression with distributed lag, considering demonetisation as a dummy variable, to study these interrelationships in the context of the Indian banking system. It is found that liquidity deficit and credit risk have a tendency to exacerbate each other irrespective of demonetisation. The work finds that funding liquidity deficit faced by the banks increases interest rate volatility. Indications of debt rollover to alleviate proxies and indicators of credit risk are there too. All in all, the work shows that demonetisation had reduced liquidity problems but increased credit risk issues.

Keywords: liquidity risk; credit risk; market risk; interest rate risk; interrelations; demonetisation; systemic risk; Indian banks.

DOI: 10.1504/AAJFA.2023.134693

Afro-Asian Journal of Finance and Accounting, 2023 Vol.13 No.6, pp.780 - 797

Received: 07 Nov 2020
Accepted: 16 Jun 2021
Published online: 06 Nov 2023 *

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