The Impact of Cost Efficiency on Liquidity Risk in the Banking Sector: Evidence from Kosovo
Keywords:Cost efficiency, DEA, banking sector, Kosovo, liquidity risk
This study aims to examine the relationship between cost efficiency and liquidity risk in a sample of Kosovo's commercial banks. We used secondary data from the financial records of seven commercial banks operating in Kosovo between 2013 and 2020. The fixed effect model (FEM) was used throughout the investigation to assess the study's hypotheses. The study is divided into two phases: first, the cost efficiency is determined using the DEA, and second, the liquidity risk factors are reviewed. While liquidity risk is considered a dependent variable, other significant determinants include bank size, asset quality, concentration, and macroeconomic variables such as gross domestic product (GDP) and inflation. The findings indicate that liquidity risk has a positive and significant association with cost efficiency, company size, and asset concentration. Additionally, the asset quality variable has a positive but insignificant effect on liquidity risk. In macroeconomic terms, inflation has been negative and considerable, whereas GDP has had little effect on liquidity risk. Profitable banks have reduced costs and are also more attractive to potential investors in higher-risk loans, which signals regulators to conduct a closer examination of these banks' performance and risk portfolios. As a result, this study also supports the need for regulatory measures such as Basel III's proposed liquidity risk norms.