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The Impact of Liquidity on Iranian Bank Profitability

Mahshid Shahchera ()
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Mahshid Shahchera : Monetary and Banking Research Institute (MBRI), Central Bank of the Islamic Republic of Iran (CBI)

Journal of Money and Economy, 2012, vol. 7, issue 1, 139-160

Abstract: This paper analyzes the impact of liquid asset holdings on bank profitability for a sample of Iranian banks. Using the Generalized Method of Moment (GMM), this study analyzes the profitability of listed banks using unbalanced panel data over the period of 2002-2009. We use the liquidity asset and liquidity asset-ratio square for estimating liquid asset and profitability relationship. The estimated relationship between liquid assets and bank profitability is as expected. Coefficients for the liquid assets ratio, its square, business cycle, regulation and its product are all statistically significant. As expected, we found evidence of a non-linear relationship between profitability and liquid asset holdings. An important finding of this study is that the business cycle significantly affects bank profits. The coefficient of business cycle has a positive and statistically significant impact on bank profitability in results of the model this suggests that profitability exhibits pro-cyclical behavior. The coefficient of regulation is negative and significant. Therefore, if regulators reduce the constraints imposed on banks, banks can make profits.

Keywords: Liquid asset; Profitability; Financial institutions; Business cycle; Dynamic panel (search for similar items in EconPapers)
JEL-codes: G21 G32 G33 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:mbr:jmonec:v:7:y:2012:i:1:p:139-160