The Effect of Macroeconomic Uncertainty on Liquidity Risk of Banks in Iran

The stateof bankrupcy and losses incurred by many banks in recent global financial crisis has doubled the importance of paying attention to the liquidity of banks as an indicator of health and stability of banking systems. In addition, due to dependence of banking system's performance on economic variables at the macro level, with a consideration on intermediatory function of banks and role of macroeconomic instability in creating financial system instability, which influences bank's performance and activity, studying the stability and health of the banking system has become more important. Therefore the purpose of this study is to evaluate the impact of macroeconomic fluctuations on liquidity risk of bank. Using GARCH and EGARCH models, panel data, the effects of macroeconomic fluctuations on liquidity risk of banks in Iran is studied by using quarterly data of 14 largest banks of the country during 2006:2-2014:1. The results show that fluctuations in GDP, inflation, exchange rate and stock price index as most important macroeconomic variables have significant effects on liquidity risk of banks. Therefore, higher fluctuations in Iranian economy can result in shortages of liquidity in banks and changing composition of bank deposits and eventually exposing banks to higher liquidity risks.