Liquidity Creation and GCC Bank Stability: The Moderating Effects of Bank Diversification and African Geopolitical Risk
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Liquidity Creation and GCC Bank Stability: The Moderating Effects of Bank Diversification and African Geopolitical Risk
Ines Ntafa and Mouna Abdelhedi
Publisher: African Review of Economics and Finance
Pub: 2026-09-29 09:18:55
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This study examines the relationship between bank liquidity creation and financial stability in GCC countries, with particular emphasis on the moderating roles of income diversification and African geopolitical risk. Using a panel of 120 banks from six GCC countries over the period 2000–2021, the analysis investigates how banks’ business models and external geopolitical conditions shape the liquidity creation–stability nexus. The results show that liquidity creation is associated with higher financial instability, with bank stability being more sensitive to liquidity generated through balance-sheet activities than through offbalance-sheet operations. Income diversification through non-interest activities enhances bank stability and moderates the destabilizing effect of liquidity creation by reducing reliance on traditional lending. In addition, African geopolitical risk conditions this relationship by altering banks’ liquidity creation behavior under heightened uncertainty. Overall, the findings highlight the importance of balanced liquidity strategies, diversified revenue structures, and geopolitical risk considerations for safeguarding banking stability in GCC and other emerging, bank-based financial systems.
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Keywords
Liquidity creation, diversification, bank stability, GCC bank, African geopolitical risk
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Keywords
Liquidity creation, diversification, bank stability, GCC bank, African geopolitical risk