Monetary economics
Vahideh Sotoudeh Mollashahi; Mohammad Talebi; Mohammad Ali Rastegar; Ramin Mojab
Abstract
After the financial crisis of 2007-2009, in which liquidity problems led to insolvency and consequently the bankruptcy of many large banks and financial institutions such as Lehman Brothers, Basel Committee on Banking Supervision introduced liquidity requirements for the most part to reduce the possibility ...
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After the financial crisis of 2007-2009, in which liquidity problems led to insolvency and consequently the bankruptcy of many large banks and financial institutions such as Lehman Brothers, Basel Committee on Banking Supervision introduced liquidity requirements for the most part to reduce the possibility of bank insolvency caused by liquidity shocks. This research develops an agent-based model of a banking system to be used to analyze the impact of the liquidity requirements on the solvency position of banks. The model devises a banking system with 12 heterogeneous banks in which banks perform their traditional activities namely taking deposits and making loans. Banks can fulfill their liquidity needs by engaging in interbank lending, selling their securities, and using central bank lending assistance. The model aims to study the behavior of different banks in response to imposing liquidity requirements. This model is calibrated using the data of Iranian listed banks during 2018-2020. Liquidity requirements are measured using liquidity coverage ratio, and the solvency position of a bank is measured using the capital adequacy ratio. The results of the simulations demonstrate that as liquidity requirements increase, the solvency position of some banks improves, some banks deteriorate, and some remain unchanged. Regarding this reaction among other various factors, profitability, inflow, and outflow of liquidity, and finally, the outflow rate parameter play an essential role.
