What is the Reaction of Iranian Listed Banks to the Implementation of Liquidity Requirements?

Document Type : Research Paper

Authors

1 Monetary and Banking Research Institute of central bank of Iran, Tehran.Iran.

2 Imam Sadegh University, Tehran, Iran

3 School of Industrial and Systems Engineering,Tarbiat Modares University, Tehran, Iran.

4 Monetary and Banking Research Institute of central bank of Iran, Tehran, Iran.

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 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.

Keywords

Main Subjects

References

Aldasoro, I., & Faia, E. (2016). Systemic loops and liquidity regulation. Journal
of Financial Stability, 27, 1-16.
BCBS (2016), Literature review on integration of regulatory capital and liquidity
instruments. BCBS Working Paper 30.
Bookstaber, R. (2012). Using agent-based models for analyzing threats to
financial stability. Office of Financial Research, Working Paper No, 0003
(U.S. Department of the Treasury).
Carletti, E., Goldstein, I., & Leonello, A. (2020). The interdependence of bank
capital and liquidity. BAFFI CAREFIN Centre Research Paper (2020-128).
Cetina, J., Lelyveld, I., & Anand, K. (2015). Making supervisory stress tests more
macroprudential: Considering liquidity and solvency interactions and
systemic risk. BCBS Working Paper.
Chan-Lau, M. J. A. (2017). ABBA: An agent-based model of the banking system.
International Monetary Fund.
DeYoung, R., Distinguin, I., & Tarazi, A. (2018). The joint regulation of bank
liquidity and bank capital. Journal of Financial Intermediation, 34, 32-46.
Distinguin, I., Roulet, C., & Tarazi, A. (2013). Bank regulatory capital and
liquidity: Evidence from US and European publicly traded banks. Journal of
Banking & Finance, 37(9), 3295-3317.
Farag, M., Harland, D., & Nixon, D. (2013). Bank capital and liquidity. Bank of
England Quarterly Bulletin, Q3.
Georg, C. P. (2013). The effect of the interbank network structure on contagion
and common shocks. Journal of Banking & Finance, 37(7), 2216-2228.
Goodhart, Charles. Liquidity risk management. Banque de France Financial
Stability Review, 11 (2008), 39-44.
Halaj, G. (2018). An agent-based model of system-wide implications of funding
risk. European Central bank, Working paper 2121.
Kara, G. I., & Ozsoy, S. M. (2020). Bank regulation under fire sale externalities.
The Review of Financial Studies, 33(6), 2554-2584.
Novokmet, A. K., & Marinović, A. (2016). Solvency and liquidity level trade-off:
Does it exist in croatian banking sector? Scientific Annals of Economics and
Business, 63(3), 429-440.
Schmitz, S. W., Sigmund, M., & Valderrama, L. (2019). The interaction between
bank solvency and funding costs: A crucial effect in stress tests. Economic
Notes: Review of Banking, Finance, and Monetary Economics, 48(2),
e12130.
Smaga, P., Wiliński, M., Ochnicki, P., Arendarski, P., & Gubiec, T. (2018). Can
banks default overnight? Modelling endogenous contagion on the O/N
interbank market. Quantitative Finance, 18(11), 1815-1829.
Sotoud

Files

History

  • Receive Date: 17 August 2020
  • Revise Date: 11 March 2021
  • Accept Date: 26 January 2021

Share

How to cite

Statistics