This paper investigates bank liquidity management and its effect on bank performance. Commercial
banks tradeoff between holding liquid assets and investing risky assets to maximize the profits.
Holding more liquid asset lowers liquidity risk of banks, but it also increases the operation costs and
probably lowers profits made by banks. Therefore, we hypothesize that the liquidity management
policy matters for bank performance. We analyze the bank data from Call Report from 1990 to 2015.
Our results show that maintaining a suitable liquidity of a bank leads to better operating performance.
However, when small banks holding a suitable level of liquidity usually face with lower stability.
When facing economic downturns, small banks holding suitable amount of liquidity assets are
vulnerable to the external market conditions and therefore increases the insolvency risks. Our study
complements the literature about the bank liqu idity management.
JEL classifications:: G20, G21
Keywords: bank liquidity management, operating performance, insolvency risk
