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Does One Size Fit All? The Impact of Liquidity Requirements on Bank\'s Insolvency: Evidence from Iranian Listed Banks

Author

Listed:
  • Sotoudeh Mollashahi, Vahideh

    (Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran)

  • Talebi, Mohammad

    (Department of Financial Management, Imam Sadegh University)

  • Rastegar, Mohammad Ali

    (School of Industrial and Systems Engineering, Tarbiat Modares University)

  • Mojab, Ramin

    (Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran)

Abstract

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.

Suggested Citation

  • Sotoudeh Mollashahi, Vahideh & Talebi, Mohammad & Rastegar, Mohammad Ali & Mojab, Ramin, 2020. "Does One Size Fit All? The Impact of Liquidity Requirements on Bank\'s Insolvency: Evidence from Iranian Listed Banks," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 15(2), pages 181-197, April.
    • Handle: RePEc:mbr:jmonec:v:15:y:2020:i:2:p:181-197
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    References listed on IDEAS

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    More about this item

    Keywords

    Liquidity Requirement; Solvency Requirement; Agent-Based Models;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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