Effects of Capital Raising on Liquidity Creation and Credit in the Banking System of Iran

Alireza Jalali Farahani (), Mostafa Sargolzaee (), Leila Dehghan Nayeri () and Amir Hossein Ghaffari Nejad ()
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Alireza Jalali Farahani : Bank Mellat
Mostafa Sargolzaee : Allameh Tabataba'i University
Leila Dehghan Nayeri : Alzahra University
Amir Hossein Ghaffari Nejad : Semnan University

Journal of Money and Economy, 2020, vol. 15, issue 1, 101-121

Abstract: With the onset of the financing crisis in the real sector of the economy and the intensification of shortcomings in the banking system of Iran in recent years, the issue of capital raising has been seriously considered by economic and banking experts to improve the health and stability of banks and their credit provision. What has been critical in this regard is the effects of capital raisings on the liquidity creation and credit provision of the banks. Therefore, using data of 29 banks during the period 2008 to 2017, and the econometric method of dynamic panel data, the relationship between the capital raising and the liquidity creation and credit providing has been studied. For this purpose, in two steps, first, the effect of capital raising in general on the liquidity creation and credit of banks, and in the next step, the impact of different methods of capital raising on these factors has been studied. The results of the estimations show that an increase in total capital will lead to a rise in liquidity creation in banks. In examining the effect of various methods of capital raising on liquidity creation, however, only the method of cash contribution and retained earnings can have a positive effect on liquidity creation, and other techniques show adverse effects. Also, based on the results of the proposed models, banks' capital raising has harmed their credit provision. It means that banks have allocated the resources from capital raisings to things other than providing loans to customers.

Keywords: Capital Raising; Banking System of Iran; Liquidity Creation; Credit Provision. (search for similar items in EconPapers)
JEL-codes: C23 G21 (search for similar items in EconPapers)
Date: 2020
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