Examining the impact of liquidity risk on the operating performance of Chinese commercial banks

This study investigates the impact of liquidity risk on Chinese commercial banks' performance from 2011 to 2019, employing the Relative Liquidity Mismatch Index (RLMI) to measure liquidity risk and Return on Average Assets (ROAA) and Net Interest Margin (NIM) as performance indicators. Using panel data and a two-step Generalized Method of Moments (GMM) approach to address endogeneity, we find that liquidity risk significantly impairs bank performance, with joint-stock banks facing higher risks than state-owned banks. While overall liquidity risk remained moderate and declined by 2019 compared to 2011, the persistent negative effects highlight the need for prudent asset-liability management. These findings emphasize the importance of establishing comprehensive liquidity risk monitoring systems and implementing effective risk management strategies to safeguard bank performance and financial stability. It suggests policymakers should promote sound liquidity practices to mitigate systemic vulnerabilities in the banking sector.