EMPIRICAL ANALYSIS OF BANK LENDING BEHAVIOR UNDER LIQUIDITY TRAP CONDITIONS

Abstract

This article provides a comprehensive theoretical and empirical analysis of bank lending behavior under liquidity trap conditions. The main objective of the study is to identify the relationship between liquidity levels and lending activity in the banking sector and assess how this relationship evolves in the modern economic environment. The empirical basis of the research consists of leading representatives of the Azerbaijani banking sector – International Bank of Azerbaijan, Kapital Bank, and PASHA Bank. A comparative analysis was conducted based on their financial statements for the period 2021–2024, and the dynamics of key financial indicators were examined. The results indicate that liquidity levels in banks have steadily increased in recent years. However, this increase has not been accompanied by a proportional expansion of loan portfolios. On the contrary, a gradual slowdown in credit growth has been observed. This finding suggests a weakening of the strong positive relationship between liquidity and lending traditionally expected in classical economic theory. The study also demonstrates that even under high liquidity conditions, banks tend to implement more cautious lending policies due to increasing risks, economic uncertainty, and limited profitability. As a result, the transmission mechanism of liquidity to the real sector has weakened, and the effectiveness of monetary policy has become more limited. This indicates the emergence of liquidity trap characteristics within the Azerbaijani banking sector.