International Journal of Nonlinear Analysis and Applications

Explaining the role of banks’ market power on the creation of liquidity in the conditions of economic boom and recession

Articles in Press

Document Type : Research Paper

Authors

Department of Financial Management, North Tehran Branch, Islamic Azad University, Tehran, Iran

Abstract

The present study aims to explain the role of banks' market power in creating liquidity during periods of economic boom and recession. The case study in this research includes commercial and specialized banks in Iran for the period from 2011 to 2021. In order to examine the research hypotheses based on the multiple regression method in the EViews 10 software, after checking the stationarity of the data and the assumptions of the regression model, the data analysis was conducted. The Lerner index was used to measure the market power of banks as the independent variable of the research, while the inverse ratio of sustainable net financing based on Basel III liquidity requirements was used to measure the dependent variable of the research, which is liquidity creation. The economic boom and recession variable was also considered as a moderating variable in the present study. The results showed that bank market power has a positive and significant effect on the creation of bank liquidity at the 99% confidence level, and the impact of economic boom and recession on liquidity creation in banks is significant at the 90% confidence level. Therefore, changes in economic boom and recession affect the liquidity creation of banks. Economic boom and recession also have a significant impact on the relationship between bank market power and liquidity creation in banks, at the 95% confidence level. This suggests that changes in economic conditions can impact the effect of bank market power on liquidity creation within banks.

Keywords

[1] A. Almeshari, M.H. Bin Dato Haji Yahya, F. Bin Kamarudin, R. Ali, and S. Abd Hamid, Liquidity creation, oil term of trade shocks, and growth volatility in Middle Eastern and North African countries (MENA), Economics 11 (2023), no. 5, 147.
[2] H. Bawazir, Liquidity, liquidity risk and liquidity regulation in banking, PhD diss., University of Southampton, 2018.
[3] A.N. Berger and C.H. Bouwman, Bank liquidity creation, Rev. Financ. Stud. 22 (2009), no. 9, 3779–3837.
[4] P. Chalaki, M. Heydari, and A. Dadashzadeh, Examining the factors influencing the liquidity of banks and financial institutions in Iran, Financ. Manag. Strat. 4 (2016), no. 12, 59–76.
[5] V.D. Dang and J. Huynh, Bank funding, market power, and the bank liquidity creation channel of monetary policy, Res. Int. Bus. Financ. 59 (2022), 101531.
[6] C. Denizer, M.F. Iyigun, and A.L. Owen, Finance and macroeconomic volatility, Board of Governors of the Federal Reserve System, International Finance Discussion Papers, 2000, no. 670.
[7] D.W. Diamond and R.G. Rajan, Liquidity risk, liquidity creation, and financial fragility: A theory of banking, J. Politic. Econ. 109 (2001), no. 2, 287–327.
[8] I. Distinguin, C. Roulet and A. Tarazi, Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks, J. Bank. Finance 37 (2013), no. 9, 3295–3317.
[9] Y. Duan and J. Niu, Liquidity creation and bank profitability, North Amer. J. Econ. Finance 54 (2020), 101250.
[10] N. Dunz, A.H. Essenfelder, A. Mazzocchetti, I. Monasterolo, and M. Raberto, Compounding COVID-19 and climate risks: The interplay of banks’ lending and government’s policy in the shock recovery, J. Bank. Finance 152 (2023), 106306.
[11] W. Easterly and A. Kraay, Small states, small problems? Income, growth, and volatility in small states, World Dev. 28 (2000), no. 11, 2013–2027.
[12] S. Fallahpour, R. Tehrani, and M. Gorgani, Examining the impact of oil price shocks and Western sanctions on liquidity creation in banks: A non-linear approach, Financ. Res. 24 (2023), no. 2, 157–183.
[13] A. Farhang, N. Mansouri, A. Mohammadpour and A. Sadeghi, The effects of economic, financial, and banking shocks on liquidity creation in Iranian banks, Sci. J. Islamic Econ. Bank. 42 (2024), 303–335.
[14] X. Fu, Y. Lin, and P. Molyneux, Bank capital and liquidity creation in Asia Pacific, Econ. Inquiry 54 (2016), no. 2, 966–993.
[15] M. Ibrahim and P. Alagidede, Financial sector development, economic volatility and shocks in sub-Saharan Africa, Phys. A: Statist. Mech. Appl. 484 (2017), 66–81.
[16] M. Isfahani, A. Mahmoudzadeh, and S. Modanizadeh, Bank money creation and the mechanism of impulse transmission, Shahid Beheshti Univ. Ind. Econ. Manag. Quart. 28 (2024), no. 2, 3–44.
[17] E. Jahangard, H. Sohrabi Vafa, and M. Karamaffar, The impact of macroeconomic variables on bank resilience with an emphasis on capital adequacy, New Econ. Trade Quart. 12 (2017), no. 1, 1–29.
[18] L. Jiang, R. Levine, and C. Lin, Competition and bank liquidity creation, J. Financ. Quant. Anal. 54 (2019), no. 2, 513–538.
[19] R. Kanani Khosrowshahi, M. Shahehera, and A. Hassanzadeh, The impact of bank market power on the liquidity of listed bank stocks, Quart. J. Econ. Dev. Res. 13 (2014), 139–156.
[20] A.K. Kashyap, R. Rajan, and J.C. Stein, Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking, J. Finance 57 (2002), no. 1, 33–73.
[21] F. Khodadad-Kashi and M. Hajian, Calculation of market power in the Iranian banking industry from 2001 to 2000, Econ. Model. Quart. 15 (2013), 95–116.
[22] M.R. King, The Basel III net stable funding ratio and bank net interest margins, J. Bank. Finance, 37 (2013), no. 11, 4144–4156.
[23] K. Kpodar, M. Le Goff, and R.J. Singh, Financial deepening, terms of trade shocks, and growth volatility in low-income countries, Revue d'econ. Dev. 26 (2018), no. 4, 27–68.
[24] X. Li, H. Feng, S. Zhao, and D.A. Carter, The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic, Finance Res. Lett. 43 (2021), 101957.
[25] I. Love and M.S. Martinez Peria, How bank competition affects firms’ access to finance, World Bank Econ. Rev. 29 (2015), no. 3, 413–448.
[26] D. Mahmoudinia, Z. Mohammadi, and A. Memarzadeh, Calculation of the liquidity creation index using the Berger and Bouwman model and its impact on banking crises: An application of panel logit and probit models, Econ. Strat. Quart. 8 (2019), no. 28, 67–110.
[27] M. Moradbeigi and S.H. Law, Growth volatility and resource curse: Does financial development dampen the oil shocks?, Resources Policy 48 (2016), 97–103.
[28] T.T.H. Nguyen, G.Q. Phan, W.-K. Wong, and M. Moslehpour, The influence of market power on liquidity creation of commercial banks in Vietnam, J. Asian Bus. Econ. Stud. 30 (2023), no. 3, 166–186.
[29] M.A. Petersen and R.G. Rajan, The effect of credit market competition on lending relationships, Quart. J. Econ. 110 (1995), no. 2, 407–443.
[30] A. Sahyouni and M. Wang, Liquidity creation and bank performance of Syrian banks before and during the Syrian war, Int. J. Financ. Stud. 7 (2019), no. 3, p. 40.
[31] E. Suleymanov and S. Talishinskaya, The analysis of competition impact on liquidity creation in the US banking industry, Preprints.org, (2024). doi: 10.20944/preprints202401.1641.v1.
[32] L. Sun, Bank market structure, bank liquidity creation and economic development, Doctoral Dissertation, Henley Business School, University of Reading, 2023.
[33] V. Viverita, Y. Bustaman, and D.N. Danarsari, Liquidity creation by Islamic and conventional banks during the Covid-19 pandemic, Heliyon 9 (2023), no. 4.
International Journal of Nonlinear Analysis and Applications

Articles in Press, Corrected Proof
Available Online from 18 November 2025
  • Receive Date: 16 March 2024
  • Revise Date: 16 June 2024
  • Accept Date: 23 July 2024