The Effect of Macroeconomic Shocks on the Liquidity Risk of the Banking system: MS-VAR Approach

Document Type : Research Paper

Authors

1 Assistant Prof, Department of Financial and Banking, Faculty of Management and Accounting, Allameh Tabataba'i University Tehran, Iran.

2 MSc, Department of Financial and Banking, Faculty of Management and Accounting, Allameh Tabataba'i University, Tehran, Iran.

Abstract

Objective: Considering the importance and special position of the banking system in Iran's economy, it should not be overlooked that the fluctuations of macroeconomic variables affect the performance of the banking system. The biggest challenge of the banking industry is identifying and managing the risks in the banking system and reacting to economic shocks. Liquidity risk is one of the most important risks in the Iranian banking system, which exposes it to serious crises. The purpose of this research is to investigate macroeconomic shocks on liquidity risk indicators in Iranian banks admitted to the Tehran Stock Exchange (TSE) and the Iranian Over-the-Counter (OTC).
Methods: To evaluate the impact of macroeconomic shocks on the considered indicators related to liquidity risk, extensive systemic shocks were considered. In the first stage, the relationship between macroeconomic variables was estimated using the MS-VAR model to predict the trend during a specific period. In the second stage, the relationship between liquidity risk indicators (the ratio of liquid assets to total assets and the ratio of the debts to the Central Bank of Iran to total debt) with macroeconomic variables was estimated, using the Panel Data model. Finally, the effect of the probable but exceptional shocks of the macroeconomic variables, extracted in the first stage, on the considered indicators related to liquidity risk was investigated. The model presented in this research used information on the Iranian banking system from 2009 to 2019 to analyze the intended effects.
Results: The results showed that the MSIAH(2)-VAR(1) model was selected as the optimal model. The stability of both regimes has been confirmed. The probability of being in regime I stood at 0/51, and regime II was 0/49. The shocks to macroeconomic variables, the shock to GDP growth in regimes II and I, the shock to inflation in regimes I and II, and the shock to exchange rate growth in regimes II and I, respectively, had the greatest impact on the first index of liquidity risk. For the second index of liquidity risk, respectively, the shock to the GDP growth in the first and second regimes, the shock to inflation in the second regime, the shock to the GDP growth in the second regime, and the shock to the exchange rate growth in the II and I had the most significant impact.
Conclusion: Estimating the ratio of cash assets to total assets, as the first indicator, and the ratio of debt to the Central Bank to total liabilities, as the second indicator, with the shock to macroeconomic variables indicated that liquidity risk indicators were strongly affected in both regimes under the crises. According to the results obtained from both of the indicators, among the considered macroeconomic variables, the shock to GDP growth in regime I had the greatest impact on both liquidity risk indicators.

Keywords

References

Acharya, V., Naqvi, H. (2012). The Seeds of a Crisis: A Theory of Bank Liquidity and Risk Taking over the Business Cycle. Journal of Financial Economics, 106, 349-366.
Adeli, O. A., Fereydooni, N. (2018). Investigating the effect of macroeconomic uncertainty on the liquidity risk of Islamic banks (Case study: Development banks). Economic Journal, 18 (7 and 8), 87-113. (in Persian)
Ahamd, F. (2021). Determinants of Liquidity Riskin the Commercial Banks in Bangladesh, European. Journal of Business and Management Research, 6(1), 164-169.
Ahmadi, V. (2021). The effect of macroeconomic uncertainty on banking stability and risk. M.Sc. Thesis, Allameh Tabatabai University of Tehran. (in Persian)
Ahmadian, A., Kianvand, M. (2014). Identifying Factors Influencing the Banking Withdrawal. Journal of Economic Research and Policies, 22 (71), 79-102. (in Persian)
Al-Harbi, A. (2017). Determinants of banks liquidity: evidence from OIC countries. Journal of Economic and Administrative Sciences, 33(2), 164-177.
Al-Homaidi, E., Tabash, M. I., Farhan, N. H & Almaqtari, F. A. (2019). The determinants of liquidity of Indian listed commercial banks: A panel data approach. Cogent Economics & Finance, 7(1), 1-20.
Allen, F., Gale, D. (2017). How Should Bank Liquidity be Regulated? World Scientific Studies in International Economics, 135-157.
Alzoubi, T. (2017). Liquidity Risk in Islamic Banks. Banks and Bank Systems, 12(3).
Amin, S. I. M., Mohamad, S. & Shah, M. E. (2017). Do Cost Efficiency Affects Liquidity Risk in Banking? Evidence from Selected OIC Countries (Adakah Kos Kecekapan Mempengaruhi Risiko Kecairan dalam Perbankan? Bukti dari Negara-negara OIC Terpilih). Jurnal Ekonomi Malaysia, 51(2), 55-71.
Arif, A. & Nauman Anees, A. (2012). Liquidity risk and performance of banking system. Journal of Financial Regulation and Compliance, 20(2), 182-195.
Athanasoglou, P. P., Brissimis, S. N. & Delis, M. D. (2008). Bank-specific, industryspecific and macroeconomic determinants of bank profitability. Journal of international financial Markets, Institutions and Money, 18(2), 121-136.
Bank for International Settlements (2009). Enhancements to the Basel II framework. Retrieved from https://www.bis.org/publ/bcbs157.pdf
Banks, E. (2005). Liquidity Risk Managing Asset and Funding Risk. Palgrave Macmillan.
Barnett, M. L., Salomom, R. M. (2012). Does It Pay to be Really Good? Addressing the Shape of the Relationship between Social and Financial Performance. Strategic Management Journal, 33, 1304-1320.
Basarir, Ç and Toraman, C. (2014). Financial Stability Analysis in Banking Sector: A Stress Test Method. The Journal of Accounting and Finance, 129-144.
Basel Committee (2008). on Banking Supervision Principles for Sound Liquidity Risk Management and Supervision.
Batten, J., Vo, X. V. (2019). Determinants of bank profitability-evidence from Vietnam. Emerging Markets Finance & Trade, 55(1), 1417-1428.
Berger, A. N., Bouwman, C. H. S. (2009). Liquidity Creation. The Review of Financial Studies, 22(9), 3779-3837.
Bonfim, D., & Kim, M. (2012). Liquidity risk in banking: is there herding? European Banking Center Discussion Paper, 24, 1-31. Retrieved from https://www.bportugal.pt
Bordeleau, E. & Graham, C. (2010). The Impact of Liquidity on Bank Profitability. Retrieved from https://doi-org.ezp.sub.su.se/http://www.bankofcanada.ca /en/res/wp/2010/wp10-38.pdf
Bordo, M., Eichengreen, B., Klingebiel, D. and Martinez-Peria, M. S. (2001). Is the crisis problem growing more severe? Economic Policy, 16(32), 52-82.
Brunnermeier, M., Gorton, G. & Krishnamurthy, A. (2013). Liquidity mismatch measurement. In Risk topography: Systemic risk and macro modeling (pp. 99-112). University of Chicago Press. Chicago.
Çetinkaya, H. (2018). Katılım Bankacılığında Risk Yönetimi: Batı Akdeniz Bölgesinde Ampirik Bir Araştırma. İstanbul: Suleyman Demirel Üniversitesi, Sosyal Bilimler Enstitüsü, Yayımlanmamış Yüksek Lisans Tezi.
Chagwiza, W. (2014). Zimbabwean Commercial Banks Liquidity and Its Determinants. International Journal of Empirical Finance, 2(2), 52-64.
Chen, W. D., Chen, Y., & Huang, S. C. (2021). Liquidity risk and bank performance during financial crises. Journal of Financial Stability, 56, 1-23.
Chen, Y. K., Shen, C. H., Kao, L. & Yeh, C. Y. (2018). Bank liquidity risk and performance. Review of Pacific Basin Financial Markets and Policies, 21(1), 1-40.
Chhibber, P. K., Majumdar, S. K. (1999). Foregn Ownership and Profitability: Property Rights, Control, and the Performance of Firm in India Industry. Journal of Law and Economics, 42(1), 209-238.
Choon, L. K., Hooi, L. Y., Murthi, L., Yi, T. S., & Shven, T. Y. (2013). The determinants influencing liquidity of Malaysia commercial banks, and its implication for relevant bodies: evidence from 15 malaysian commercial banks (Honours Unpublished Thesis). UniversitiTunku Abdul Rahman, Kampar.
Cucinelli. D. (2013). The Determinants of Bank Liquidity Risk within the Context of Euro Area. Interdisciplinary Journal of Research in Business, 2(10), 51-64.
Dadbin, M., Hanjari, S. (2014). An overview of the crisis tests in the banking industry and suggestions for the Iranian banking industry. Risk management and financial engineering conference (in Persian).
Deléchat, C., Henao, C., Muthoora, P. & Vtyurina, S. (2014). The Determinants of Banks' Liquidity Buffers in Central America. Monetoria, II (1), 83-129.
Diamond, D. W., Dybvig, P. H. (1983). Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy, 91(3), 401-419.
Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307-327.
Dietrich, A., Hess, K. & Wanzenried, G. (2014). The good and bad news about the new liquidity rules of Basel III in Western European countries. Journal of Banking & Finance, 44, 13-25.
Dinger, V. (2009). Do foreign-owned banks affect banking system liquidity risk? Journal of Comparative Economics, 37(4), 647-657.
Distinguin, I., Roulet, C. & Tarazi, A. (2013). Bank Regulatory Capital And Liquidity: Evidence from US and European Publicly Traded Banks. Journal of Banking and Finance, 37, 3295-3317.
Doris Madhi, C. (2017). The Macroeconomic Factors Impact on Liquidity Risk: The Albanian Banking System Case. European Journal of Economics and Business Studies, 3(1), 32-39.
Drehmann, M. & Nikolaou, K. (2013). Funding liquidity risk: definition and measurement. Journal of Banking & Finance, 37(7), 2173-2182.
Drehmann, M., Nikolaou, K. (2009). Funding Liquidity Risk: Definition and Measurement. European Central Bank.
Elah, M. (2017). Factors Influencing Liquidity in Leading Banks “A Comparative Study of Banks Operating in UK and Germany Listed on LSE”. Imperial Journal of Interdisciplinary Research (IJIR), 3(2), 2454-1362.
Ehrmann, M., Ellison, M. and Valla, N. (2003). Regime-Dependent Impulse Response Functions in a Markov-Switching Vector Autoregression Model. Economics Letters, 78, 295-299.
Falconer, B. (2001). Structural Liquidity: The Worry beneath the Surface. Balance Sheet, 9(3), 13-19.
Fallah Shams, M., Banisharif, A. (2021). Investigating the Financial Risk Spillover in Banks Accepted in Tehran Stock Exchange Market through MGARCH Approach. Financial Research Journal, 23(1), 87-107. (in Persian)
Fallahi, F. (2014). Money-Output Relationship in Iran: A Markov Switching Causality. Journal of Applied Economics Studies in Iran, 3(11), 107-128. (in Persian)
Feng, W. (2017). Analysis of Factors Affecting Bank Liquidity. International Conference on Financial Management, Education and Social Science.
Fentaw, L. (2016). Determinants of Commercial Banks Liquidity Risk: Evidence from Ethiopia. Research Journal of Finance and Accounting, 7(15), 47-61.
Gatev, E., Schuermann, T. & Strahan, P. E. (2007). Managing bank liquidity risk: How deposit-loan synergies vary with market conditions. The Review of Financial Studies, 22(3), 995-1020.
Ghorbani, R., Kordestani, G., Haghighat, H., Ghaemi, M., Azizmohammadlou, H. (2021). Developing a Model for Evaluating the Effectiveness of Risk Management in the Banking Industry. Financial Research Journal, 22(4), 496-520. (in Persian)
Gill, A., Biger, N. & Mathur, N. (2011). The Effect of Capital Structure on Profitability: Evidence from the United States. International Journal of Management, 28(4), 3-15.
Goldstein, M., and Turner, P. (1996). Banking Crises in Emerging Economiec: Origins and Policy Options. Bank for International Settlements, BIS Economic Papers, No. 46.
Goodhart, C. (2008). Liquidity risk management. Financial Stability Review, 11(6), 39-44.
Goodhart, C. A. E., Sunirand, P., & Tsomocos, D. P. (2003). A Model to Analyse Financial Fragility. Error! Hyperlink reference not valid. Working Papers Series 2003fe13, Oxford Financial Research Centre.
Haliti Rudhani, L., Driton, B. (2019). The Effect of Liquidity Risk ON Financial Performance. Advances in Business-Related Scientific Research Journal, 10(2), 20-31.
Haneef, S., Riaz, T., Ramzan, M., Rana, M. A., Ishaq, H. M. & Karim, Y. (2012). Impact of risk management on non-performing loans and profitability of banking 54 sector of Pakistan. International Journal of Business and Social Science, 3(7), 307-315.
Hartlage, A. W. (2012). The Basel III liquidity coverage ratio and financial stability. Michigan Law Review, 111(3), 453-484.
Horvath, R., Seidler, J. & Weill, L. (2012). Bank Capital and Liquidity Creation: Granger-Causality Evidence. European Central Bank Working Paper Series, No. 1497.
Incekara, A., Çetinkaya, H. (2019). Liquidity Risk Management: A Comparative Analysis of Panel Data Between Islamic And Conventional Banking In Turkey. Procedia Computer Science, 158, 955-963.
Iqbal, A. (2012). Liquidity risk management: a comparative study between conventional and Islamic banks of Pakistan. Global Journal of Management and Business Research, 12(5).
Jahangard, E., Abdolshah, F. (2017). The effect of macroeconomic variables on banking industry stability. The Journal of Economic Policy, 9(18), 205-229. (in Persian)
Janati, A. & Arbabian, S., Khojasteh, Z. (2016). The Impact of Macroeconomic Determinants on Banking Stability and Risk. Journal of Monetary and Banking Research, 9(29), 487-511. (in Persian)
Jasiene, M., Martinavicius, J., Jaseviciene, F. & Krivkiene, G. (2012). Bank Liquidity Risk: Analysis and Estimates. Business, Management and Education, 10(2), 186-204.
Kafaie M., Rahzani M. (2017). The Effect of Macroeconomic Variables on Banks’ Liquidity Risk in Iran . Journal of Economic Research and Policies, 25 (81), 261-310. (in Persian)
Kapopoulos, P., Lazaretou, S. (2007). Corporate Ownership Structure and Firm Performance: Evidence from Greek Firms. Corporate Governance, 15(2), 144-158.
Karimkhani, A. A. & Frati, M. (2012). Investigating the effect of macroeconomic variables on the resources and expenditures of banks. Sepah Bank Risk Research and Control Department. (in Persian)
Khodabakhshi, A., Zohrevand, B. (2020). The Effect of Inequality of Income and Economic Growth on the Current Account Balance of Iran: A Vector Auto Regression (VAR) Model for Iran. Iranian Journal of Trade Studies, 24(95), 41-68. (in Persian)
Khoshnood, Z., Akbari Alashti, T., Khansari, R. (2014). Designing a new guideline for liquidity risk management in the Iranian banking system. Monetary and Banking Research Institute of the Central Bank of Iran. (in Persian)
Kordbacheh, H., Pordel Nooshabadi, L. (2012). The Determinants of Non-performing Loans in Iranian Banking Industry. Iranian Journal of Economic Research, 16(49), 117-150.
(in Persian)
Krolzig, H. (1998). Econometric Modelling of Markov-Switching Vector Autoregressions using MSVAR for OX. Mimeo Nuffield College.
Krolzig, H. and Toro, J. (1999). A New Approach to the Analysis of Shocks and the Cycle in a Model of Output and Employment. EUI Working Paper ECO 99/30.
Krykliy, O., Luchko, I. (2018). Model of Stress-testing of Banks’ Liquidity Risk in Ukraine. Financial Markets, Institutions and Risks, 2(2), 123-132.
Leykun, F. (2016). Determinants of Commercial Banks’ Liquidity Risk: Evidence from Ethiopia. Research Journal of Finance and Accounting, 7(15), 47-61.
Luo, Y., Tanna, S. & De Vita, G. (2016). Financial openness, risk and bank efficiency: Cross-country evidence. Journal of Financial Stability, 24(3), 32-148.
Mirza’i, E., Mohammadi, T., Shakeri, A. (2016). The Interaction between Non-Performing Loans and Macroeconomic Conditions:A Panel Vector Autoregressive Approach. Economics Research, 16(60), 183-220. (in Persian)
Mohammad, S., Asutay, M., Dixon, R., & Platonova, E. (2020). Liquidity Risk Exposure and its Determinants in the Banking Sector: A Comparative Analysis between Islamic, Conventional and Hybrid Banks. Journal of International Financial Markets, Institutions & Money, 66.
Molyneux, P. & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking & Finance, 16(6), 1173-1178.
Moshiri, S., abdolshah, F. (2017). The estimation of credit loss distribution of Iran’s banking industry using stress test. Journal of Economic Research (Tahghighat- E- Eghtesadi), 52(4), 935-962. (in Persian)
Moussa, M. A. B. (2015). The determinants of bank liquidity: case of Tunisia. International Journal of Economics and Financial Issues, 5(1), 249-259.
Munteanu, I. (2012). Bank liquidity and its determinants in Romania. Procedia Economics and Finance, 3, 993-998.
Nguyen, M., Perera, S. & Skully, M. (2017). Bank market power, asset liquidity and funding liquidity: International evidence. International Review of Financial Analysis, 54, 23-38.
Papavassiliou, V. G. (2013). A New Method for Estimating Liquidity Risk: Insights from a Liquidity-Adjusted CAPM Framework. Journal of International Financial Markets, Institutions and Money, 24, 184-197.
Parameswar, N., & Murthy, S. R. (2012). The Determinants of Bank Liquidity during Financial Crisis: A Comparative Study of the GCC Banking Industry. Journal of Academy of Business and Economics, 12(3), 10-21.
Pascual, L. B., Trujillo-Ponce, A. & Riportella, C. C. (2013). Factors Influencing Banking Risk in Europe: Evidence from the Financial Crisis. Social Science Research Network.
Perrini, F., Rossi, G & Rovetta, B. (2008). Does Ownership Structure Affect Performance? Evidence from the Italian Market. Corporate Governance, 16(4), 312-325.
Pilinko, V. Romancenco, A. (2014). A Macro-financial Model for Credit Risk Stress testing: The Case of Latvia.
Pracoyo, A., Imani, A. (2018). Analysis of the effect of capital credit risk, and liquidity risk on profitability in banks. Jurnal Ilmu Manajemen & Ekonomika, 10(2), 44-50.
Psaradakis, Z. and Spagnolo, N. (2003). On the Determination of the Number of Regimes in Markov Switching Autoregressive Models. Journal of Time Series Analysis, 24: 237-252.
Rahimi Baghi, A., ArabSalehi, M., Vaez Barzani, M. (2019). Assessing the Systemic Risk in the Financial System of Iran using Granger Causality Network Method. Financial Research Journal, 21(1), 121-142. (in Persian)
Ree, J. J. K. (2011). Impact of the global crisis on banking sector soundness in Asian low-income countries. IMF Working Papers 2011/115, International Monetary Fund.
Reghabi, A. (2019). The Effect of Severe Macroeconomic Shocks on the Volume of non Performance loan of the Banking System by using Vector Autoregression Model with Time Varing Parameters (TVP-VAR). M.Sc. Thesis, Allameh Tabatabai University of Tehran. (in Persian)
Reserve Bank of India (2012, November). Liquidity Risk Management by Banks. Retrieved from Error! Hyperlink reference not valid.
Rostamzadeh, P., Shahnazi, R., Neisani, M. S. (2018). Identification of Factors Affecting on Credit Risk in the Iran Banking Industry of Iran Using Stress Test. Journal of Economic Modeling Research, 8 (32), 91-128. (in Persian)
Ruziqa, A. (2013). The impact of credit and liquidity risk on bank financial performance: The case of Indonesian Conventional Bank with total asset above 10 trillion Rupiah. International Journal of Economic Policy in Emerging Economies, 6(2), 93-106.
Saberian Ranjbar, S., & Heidari, H. (2010). Introduction of stress tests to assess the vulnerability of a financial system. Economic News, 8 (130), 147-153. (in Persian)
Sadka, R. (2011). Liquidity Risk and Accounting Information. Journal of Accounting and Economics, 52, 144-152.
Salehabadi, A., Allahyari, M. (2016). The use of stress testing in regulatory and supervisory perspectives. Journal of Investment Knowledge, 5(19), 213-234. (in Persian)
Sedqi, H. (2014). Credit risk crisis test in the banking system. The second conference on risk management and financial engineering, University of Tehran. (in Persian)
Shakeri, A., mohammadi, T., Jafari, M. (2019). The Effect of Financial Markets Volatilities on Oil Market; An Emphasis on 2008 Financial Crisis. Economics Research, 19(74), 1-38. (in Persian)
Shamas, G., Zainol, Z. & Zainol, Z. (2018). The Impact of Bank’s Determinants on Liquidity Risk: Evidence from Islamic Banks in Bahrain. Journal of Business & Management (COES&RJ-JBM), 6, 1-22.
Shen, C. H., Chen, Y. K., Kao. L. F. & Yeh. C. Y. (2009). Bank liquidity risk and performance. In 17th Conference on the Theories and Practices of Securities and Financial Markets. His-Tze Bay.
Singh, A., & Sharma, A. K. (2016). An empirical analysis of macroeconomic and bank-specific factors affecting liquidity of Indian banks. Future Business Journal, 2(1), 40-53.
Sopan, J., Dutta, A. (2018). Determinants of Liquidity Risk in Indian Banks: A Panel Data Analysis. Asian Journal of Research in Banking and Finance, 8(6), 47-59.
Sudirman, I. (2015, March). Determinants of bank liquidity in Indonesia: Dynamic panel data analysis. 11th International Annual Symposium on Management, The Singhasari Resort, Batu, Malang, Indonesia. DOI10.2139/ssrn.2583985
Tehrani, R., Seraj, M., Foroush Bastani, A., Fallahpour, S. (2020). Evaluation of the Effect of the Banking Sector Systemic Risk on the Macroeconomic Performance of Iran. Financial Research Journal, 22(3), 297-319. (in Persian)
Tesfaye, T. (2012). Determinants of Bank Liquidity and their Impact on Financial Performance: Empirical Study on Commercial Banks in Ethiopia. Addis Ababa University.
Trujillo‐Ponce, A. (2013). What determines the profitability of banks? Evidence
from Spain. Accounting & Finance, 53(2), 561-586.
Vodava, P. (2011). Liquidity of Czech Commercial Banks and its Determinants. International Jounal of Mathematical Models and Methods in Applied Sciences, 5(6), 1060-1067.
Vodova, P. (2013). Determinants of Commercial Bank Liquidity in Hungary. Financial Internet Quarterly (E-Finance), 9(3).
Weiß, G. N. F., Supper, H. (2013). Forecasting Liquidity-Adjusted Intraday Value-AT-Risk with Vine Copulas. Journal of Banking and Finance, 37, 3334-3350.
Wójcik-Mazur, A., & Szajt, M. (2015). Determinants of liquidity risk in commercial banks in the European Union. Argumenta Oeconomica, 2(35), 25-47.
Wooldridge, J. M. (2010). Introductory econometrics: A modern approach, 5th edition.
Wudu Negash, D., Veni, P. (2019). Determinants of Liquidity Risk in Selected Commercial Banks in Ethiopia. International Journal of Advanced Research in Management and Social Sciences, 8(4), 108- 124.
Financial Research Journal
Volume 24, Issue 4
2023
Pages 528-576

Files

Share

How to cite

Statistics