Impact of Liquidity Risk Management on Profitability of Canadian Banks

Abstract

This study analyzes the impact of liquidity management on the performance of banks in Canada. The Canadian economy is significantly reliant on the banking sector, which plays a vital role by offering financial services, including lending to corporate, commercial, and retail clients. The stability of the banking system is essential for the continuity of successful economic activities within the country. Strong liquidity ratios are indicative of financial stability and serve as a foundation for customer confidence. This study employs descriptive, correlation, and regression analyses and compares the liquidity and performance of Canadian banks during the period from 2022 to 2024, using financial data primarily obtained from banks’ financial statements. The findings indicate that the relationship between liquidity and profitability is mixed, varying from positive, sometimes negative or insignificant according to the specific variables and factors considered in the analysis. In general, a stable liquidity position contributes to greater stakeholder confidence, improved business activity, and higher income and profitability. Regulatory authorities should maintain vigilant oversight of banks’ liquidity metrics to safeguard financial stability. External influences such as ongoing tariff conflict with United States and unstable geopolitical conditions can significantly affect bank performance and erode customer confidence. To address such challenges, banks should maintain sufficient buffer assets to meet liquidity demands. Deposit runs, whether triggered internally or externally, can become unmanageable; therefore, a conservative liquidity approach is necessary to preserve customer trust. Complex and high-risk financial products must be rigorously monitored. Additionally, concentration risk should be managed such that banks diversify their exposure across different sectors of the economy, ensuring that under-performance in a single industry segment does not jeopardize the overall stability of the banking sector.

Keywords

Liquidity Risk, Banks Performance, Canada