Liquidity Creation

This paper examines the impact of internal bank governance on bank liquidity creation in Iran during 2010-2017. We analyze whether banks with larger size and liquidity levels creates higher levels of liquidity. The results using panel GMM method show that corporate governance has a positive effect on liquidity creation; of course, it is not significant. Also, this effect is not affecting by bank size level, but a bank with higher liquidity levels have a higher elasticity to the governance change. Moreover, banks with higher financial stability have higher liquidity creation. Furthermore, the equity ratio index harms liquidity creation, which means “the fragility hypothesis” is confirmed within Iranian banks.

With the onset of the financing crisis in the real sector of the economy and the intensification of shortcomings in the banking system of Iran in recent years, the issue of capital raising has been seriously considered by economic and banking experts to improve the health and stability of banks and their credit provision. What has been critical in this regard is the effects of capital raisings on the liquidity creation and credit provision of the banks. Therefore, using data of 29 banks during the period 2008 to 2017, and the econometric method of dynamic panel data, the relationship between the capital raising and the liquidity creation and credit providing has been studied. For this purpose, in two steps, first, the effect of capital raising in general on the liquidity creation and credit of banks, and in the next step, the impact of different methods of capital raising on these factors has been studied. The results of the estimations show that an increase in total capital will lead to a rise in liquidity creation in banks. In examining the effect of various methods of capital raising on liquidity creation, however, only the method of cash contribution and retained earnings can have a positive effect on liquidity creation, and other techniques show adverse effects. Also, based on the results of the proposed models, banks' capital raising has harmed their credit provision. It means that banks have allocated the resources from capital raisings to things other than providing loans to customers.