Bank liquidity risk and asset and liability management at Jordanian commercial banks

The relatively large size of the commercial banks in Jordan compared to other sectors in the economy as well as the turmoil in the MENA region motivated me to explore these organisations’ asset liability management framework. This thesis utilized quantitative methods to study bank liquidity risk and asset and liability management (ALM) in Jordanian commercial banks over the period 2004 to 2015. The thesis evaluates the impact of the ALM framework on Jordanian commercial banks during 2017/2018 using questionnaires that explored the current framework of the ALM, the role of the asset liability committee (ALCO), and its effect on risk-management techniques in terms of liquidity, interest rate, credit, and market risks. It also investigates the tools used by commercial banks to estimate and set their risk exposures. The results of the questionnaires indicate the existence of the ALM process in all of Jordan’s commercial banks whereas ALCO only had limited authority in terms of identifying and setting risk exposures. The findings of this study show liquidity risk to be one of the most significant risks that Jordanian commercial banks have to mitigate against most of these banks rely on central bank guidelines to manage and set their liquidity and funding liquidity risk limits. The breadth of commercial banks’ activities in Jordan as regards financing most of the economic sectors in the country through their role as financial intermediaries marks the importance of shielding them from liquidity risks. The thesis analysed the impact of internal bank factors such as profitability, capital, credit, size and quality of management on liquidity risk for thirteen Jordanian commercial banks while controlling for the regulatory and macroeconomic environment using a panel data model. The econometric results show that profitability has a positive impact on liquidity risk whilst the existence of an efficient management has a negative impact on liquidity risk. Finally, the impact of capital and credit on liquidity risk had an ambiguous effect due to the interactions between the different factors.