The Liquidity Creation and Determining the Role of Financial Intermediation of Banks in Iran

In accordance with the tenet of relevant theories of money and finance, the main role of banks in the economy is de facto considered to be the creation of money through holding the cash deposits of public and in turn extending the required facilities to the concerned people viz-a-viz these deposits. In fact banks are de jure assumed to be the liquidity pool in which by changing the maturity of their balance sheet entries, they can create liquidity. In this context, banks will prevail the opportunity to allocate the non-pecuniary entries of their balance sheets for non banking sectors and hold the pecuniary entries of the balance sheet for their depositors and borrowers. As a result, the depositors keep their deposits with banks and the borrowers will receive the needed money in the form of loans in an appropriate time. In addition, banks can also create liquidity by using the entries of their balance sheets and transform the less liquid assets into liabilities quid pro qua. Thus in this paper, an attempt is made to estimate the index of liquidity creation in the Iranian banking system. This index is blend of liquidity creation process of banks which includes per se their assets, liabilities and capitals in toto. However it is pertinent to note that most of the studies in this area, have emphasized on reviewing the role of banks liquidity creation through extension of loans and credits, while in this paper, we have tried to focus on the structure of balance sheet of banking system for the period 2007-2012, sui generis.