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

Vahideh Sotoudeh Mollashahi (), Mohammad Talebi (), Mohammad Ali Rastegar () and Ramin Mojab ()
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Vahideh Sotoudeh Mollashahi: Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran
Mohammad Talebi: Department of Financial Management, Imam Sadegh University
Mohammad Ali Rastegar: School of Industrial and Systems Engineering, Tarbiat Modares University
Ramin Mojab: Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran

Journal of Money and Economy, 2020, vol. 15, issue 2, 181-197

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.

Keywords: Liquidity Requirement; Solvency Requirement; Agent-Based Models (search for similar items in EconPapers)
JEL-codes: C63 G21 G28 (search for similar items in EconPapers)
Date: 2020
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