:: Volume 15, Issue 2 (Spring 2020) ::
J. Mon. Ec. 2020, 15(2): 181-197 Back to browse issues page
Does One Size Fit All? The Impact of Liquidity Requirements on Bank's Insolvency: Evidence from Iranian Listed Banks
Vahideh Sotoudeh Mollashahi 1, Mohammad Talebi2, Mohammad Ali Rastegar3, Ramin Mojab1
1- Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran
2- Department of Financial Management, Imam Sadegh University
3- School of Industrial and Systems Engineering, Tarbiat Modares University
Abstract:   (536 Views)
According to the Basel III regulatory framework, uniform minimum liquidity requirements have been imposed on all types of banks. Using an agent-based model of a banking system, we investigate the effects of liquidity requirements on banks' insolvency under two policy experiments in one of which the minimum liquidity requirements are applied uniformly and in the other differentially across banks. The model introduces a banking system with 12 heterogeneous banks that must also comply with two liquidity requirements while performing their daily activities of taking deposits and making loans. The model is applied to the Iranian banking system. Results illustrate that because banks respond differently to liquidity requirements, applying one size minimum liquidity requirements to all kinds of banks, strengthens the likelihood of a liquidity shock turns into banks' insolvency and could increase banking system instability. Thus our findings highlight that to achieve financial stability at the national level, policymakers should revise the current one size fits all approach when designing liquidity requirements.
Keywords: Liquidity Requirement, Solvency Requirement, Agent-Based Models
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Type of Study: Original Research - Empirical | Subject: Monetary Economics
Received: 19 Sep 2020 | Accepted: 28 Dec 2020 | Published: 22 Apr 2020

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Volume 15, Issue 2 (Spring 2020) Back to browse issues page