Capital Bank, liquidity Risk and Credit in Iran's Banks

Document Type : Research Paper


1 Assistant Professor of Economics, Payame Noor University

2 Associate Professor of Economics, Payame Noor University


The present study investigates the effect of capital on liquidity and credit risks in the banking industry of Iran using a GMM system. Eviews9 and stata12 software have been used to carry out this research. The research findings show that there is a significant and significant correlation between bank capital and risk in the banking industry of Iran, so that by increasing the capital of a bank by as much as one percent, the liquidity risk on the basis of various indexes can decrease from 0/1% to 0/4% Find out. In the case of credit risk, the increase in bank capital leads to a reduction in credit risk from 5/7 to 6/8 percent. Based on the findings of this research and tests, the ethical hazard theory in the banking industry is confirmed. And the charter theory regarding the banking system of Iran is not approved. In this study, the size of the bank shows a direct and significant relationship with liquidity risk, so that a unit of increase in the bank's size index has increased the risk of liquidity from 0/003 to 0/008. There is also a meaningful relationship between the variables of economics and the risk of liquidity and credit. The results of the research also suggest that risk management in banks depends not only on internal banking factors, but also on macroeconomic factors.


Main Subjects

  1. Altunbas, Y. S., Carbo, E., Gardener, P. M., & Molyneux, P. (2007). Examining the relationships between capital, risk and  efficiency in European banking. European Financial Management, 13(1), 49-70.
  2. Aggarwal, R,. & Jacques, K. T. (1998). Assessing the impact of prompt corrective action on bank capital and risk. Federal Reserve Bank of New York  Economic Policy Review, 23–32.
  3.       Agusman, A. Monroe, G.S. Gasbarro, D., & Zumwalt, J .K. (2008). Accounting and capital market measures of risk: evidence from Asian banks during 1998 –2003. Journal of Banking and Finance, 32 (4), 480–488.
  4. Baltagi, B. (2008). Econometric Analysis of Panel Data. John Wiley & Sons Ltd.
  5. Bessler, W., & Kurman, P . (2014). Bank risk factors and changing risk exposures: Capital market evidence before and during the financial crisis. Journal of Financial Stability, Volume 13, August, 151-166.
  6. Berger, A. N., & Bouwman, C. H. S. (2013). How does capital affect bank performance during financial crises? Journal of Financial Economics,109, 146–176.
  7. 7.      Bougatef, K., &  Nidhal,  M. (2016).  The impact of prudential regulation on bank capital and risk-taking: The case of MENA countries, The Spanish Review of Financial Economics, Volume 14, Issue 2, July–December 2016, Pages 51-56, ISSN 2173-1268.
  8. Chaibi, H., & Ftiti, Z. (2014). Credit risk determinants: Evidence from     across-country study. Research in International Business & Finance, 33, 116.
  9. Chien-Chiang, L., & Meng-Fen, H. (2013). The impact of bank capital on profitability and risk in Asian banking.  Journal of International Money and Finance, 32 (2013) 251–281.
  10. Central Bank of the Islamic Republic of Iran, National Accounts of Iran, and Economic Report and Balance Sheet of the Central Bank, different years, (In Persian).
  11. Ejlafi, M. (2014). Investigating the Relationship between Focus and Financial Stability of Banks in Iran, Master's Thesis, Institute of Higher Education in Banking Science, Tehran, Iran (In Persian).
  12. Davies, H. (2010). The Financial Crisis: Who is to Blame? polity press, UK.
  13. Financial soundness indicators (FSI), (2006). compilation guide Washington, D.C. : International Monetary Fund.
  14. Fisher, I. (1933). The debt-deflation theory of great depressions. Econometrica,  1(4), 337-357.
  15. Hoffmann, P. (2011). Determinants of the profitability of the US banking industry. International Journal of Business and Social Science, 2: 22-45.
  16. Bjorn, I,. &  Christian, R. The relationship between liquidity risk and credit risk in banks, Journal of Banking & Finance, Volume 40, March 2014, Pages 242-256, ISSN 0378-4266.
  17. Ghosh.s. (2014). Risk, capital and financial crisis: Evidence for GCC banks, Borsa Istanbul Review, Volume 14, Issue 3, September 2014, Pages 145-157, ISSN 2214-8450,
  18. Hayashi, F. (2000). Econometrics, Princeton University Press.
  19. Greuning ,V. H. B., & Bratanovic, S. (2003). Analyzing and managing banking risk : a framework for assessing corporate governance and financial risk management. 2nd, Washington DC, World Bank.
  20. Geanakoplos, J. (2010). The leverage cycle. In NBER Macroeconomics Annual2009, Volume 24 (pp. 1-65). Chicago: University of Chicago Press.
  21. Goddard, J., Molyneux, P., & Wilson, J. OS. (2004). The profitability of European banks: a cross-sectional and dynamic panel analysis. The Manchester School 72 (3), 363–381.
  22. Karen, H. A. (2005). Essentials of financial risk management. John Wiley and Sons Publications, Hoboken, New Jersey, united states of America.
  23. Kochubey .T., & Dorota ,K. (2015) The Relationship between Capital,liquidity and risk in commercial banks. Coratian  national bank, june.
  24. Kocabay, S. A. (2009). Bank competition and banking system stability: Evidence from Turkey (Doctoral dissertation). Middle East Technical University.
  25. Koopman, S. J., & Lucas, A. (2003). Business and Default Cycles for Credit Risk.Tinbergen Institute Discussion Paper, TI 2003.
  26. Khoshnoud, Z., &  Esfandiari, M. (2017). The Mechanism of Adjustment of Capital Adequacy Rations in the transition from Banking Health to Financial Stability. Quarterly Journal of Monetary and Banking Research. Vol.8, N.25, Autumn (In Persian).
  27. KHoshsima, R., SHahyki tash, SH. (2013). Effect if Credit, Operational, and Liquidity Risks in the Effectiveness if the Iranain Banking System. Quarterly Journalism and Budget, 17(4), 69-95 (In Persian).
  28. Kubat, M. (2014). Does Basel III bring anything new?  03 June, 2nd Economics & Finance Conference, Vienna.
  29. Lee, C. C., & Hsieh, M. F. (2013a). The impact of bank capital on profitability and risk in Asian banking. Journal of InternationalMoney and Finance, 32, 251–281.
  30. Liu, H., & Wilson, J.O.S. (2010). The Profitability of Banks in Japan. App1. Finance. Econ, 20(24), 1851-1866.
  31. Talebi, Mohammad. Shyrzadi, Nazanin (2011). Credit risk, measurement and management. Publishing House, Tehran,  (In Persian).
  32. Nadiri, M., & Mohammadi, T. (2011). Investigating the Effect of Institutional Structures on Economic Growth by GMM Dynamic Panel Data. Quarterly Journal of Economic Modeling, Vol. 5, No. 3, pp. 24-1 (In Persian).
  33. Yazdanpanah, A., & Shakib, S. (2009). Factors Affecting the Risk of Liquidity of Banks. Journal of Financial Studies, No. 3, Autumn, pp. 27-54 (In Persian).
  34. Jacques. K., & Nigro. P. (1997). Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach. Journal of Economics and Business,  vol. 49, issue 6, 533-547.
  35. Jokipii, T., & Milne, A. (2011). Bank capital buffer and risk adjustment decisions. Journal of Financial Stability, 7,165–178.
  36. Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income  structure and risk:An empirical analysis of European banks. Journal of Banking& Finance, 32, 1452–1467.
  37. Parasız, I. (2000). Para Banka ve Finansal Piyasalar, 7.Baskı, Bursa, EzgiKitabevi Yayınları.
  38. Rime, B. (2001). Capital requirements and bank behavior: empirical evidence for Switzerland. Journal of Banking and Finance, 25(4), 789–805.
  39. Saibal, G. (2014). Risk, capital and financial crisis: Evidence for GCC banks. Borsa Istanbul Review, 14-3 (2014) 145e157.
  40. Shrieves, R.E., & Dahl, D. ( 1992). The relationship between risk and capital in commercial banks. Journal of Banking and Finance, 16,439–457.
  41. Staikouras, C. K., & Wood, G. E. (2004). The Determinants of European Bank Profitability. Int. Bus. Econ. Res. J, 3(6), 57-68.
  42. Tripe, D. (1999). Liquidity Risk in Banks. New Zealand, Massey University.
  43. Van Roy, P. (2005). The impact of the 1988 baslel  accord on bank’s capital ratios and credit risk taking: An international study. European Center for Advanced  Research  in Economics and Statistics (ECARES) Av. F.D. Roosevelt, Brussels, Belgium.
  44. Varotto, S. (2011). Liquidity Risk, Credit Risk, Market Risk and Bank Capita. ICMA Centre, Discussion Papers in Finance DP (20) 11-02.
  45. Wu, D., (2015). The Effects of Government Capital and Liquidity Support Programs on Bank Lending: Evidence from the Syndicated Corporate Credit Market. August 2015, Journal of Financial Stability, Vol 21, 13-25.
  46. Zhang, D., Cai, J., Dickinson, D. G., & Kutan, A. M. (2015). Nonperforming loans, moral hazard-and regulation of the Chinese commercial banking system, Journal of Banking & Finance.