وحیده ستوده

After the financial crisis of 2007-2009, in which liquidity problems led to insolvency and consequently the bankruptcy of many large banks and financial institutions such as Lehman Brothers, Basel Committee on Banking Supervision introduced liquidity requirements for the most part to reduce the possibility of bank insolvency caused by liquidity shocks. This research develops an agent-based model of a banking system to be used to analyze the impact of the liquidity requirements on the solvency position of banks. The model devises a banking system with 12 heterogeneous banks in which banks perform their traditional activities namely taking deposits and making loans. Banks can fulfill their liquidity needs by engaging in interbank lending, selling their securities, and using central bank lending assistance. The model aims to study the behavior of different banks in response to imposing liquidity requirements. This model is calibrated using the data of Iranian listed banks during 2018-2020. Liquidity requirements are measured using liquidity coverage ratio, and the solvency position of a bank is measured using the capital adequacy ratio. The results of the simulations demonstrate that as liquidity requirements increase, the solvency position of some banks improves, some banks deteriorate, and some remain unchanged. Regarding this reaction among other various factors, profitability, inflow, and outflow of liquidity, and finally, the outflow rate parameter play an essential role.

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.