The Interplay of Liquidity, Credit Risk, and Profitability in the Global Economy

Abstract

Liquidity and profitability are two primary indicators for assessing the performance and stability of the banking sector. This study aims to analyze the relationship between liquidity, credit risk, and banking profitability within the context of economic globalization. Globalization has expanded opportunities for financial expansion and diversification of funding sources, yet it has also increased exposure to market risks and exchange rate volatility. Using a historical review of empirical literature, this research highlights that an optimal level of liquidity plays a crucial role in maintaining the balance between fulfilling short-term obligations and achieving sustainable profitability. Conversely, excessive liquidity or high credit risk can reduce financial efficiency and weaken banks competitiveness in the global market. The findings are expected to provide both theoretical and practical contributions to the development of risk management strategies and banking policy formulation in an increasingly dynamic global economy. By emphasizing the interconnectedness of liquidity, credit risk, and profitability, this study underscores the importance of adaptive financial management to sustain banking stability amid global economic integration.