Investigating the effect of information value of the third type of Basel liquidity risk criteria

Dissertation for Master's Degree in Accounting

Abstract

This research aimed to provide answers to some important questions regarding the new international liquidity standards. First, while the new liquidity risk ratios provide additional methodologies for coverage ratios and net cash assets, they provide components and assumptions that are generally untested. Secondly, since the recent theoretical researches raise important points of view on the causes of liquidity risk or the escalation of financial crisis, empirical studies have tested the link between bank failures and liquidity risk. Therefore, this research tested the relationship between banks' helplessness and new criteria and the third type of liquidity risk. For this purpose, 30 banks from the banks admitted to the stock exchange and other banks were examined during 10 years (300 observations). The results showed that the coefficient of the explanatory variable of positive liquidity coverage ratio and its relationship with bank financial difficulties is significant. Therefore, the first hypothesis that there is a significant relationship between positive liquidity coverage ratio and bank financial distress is accepted. In simpler words, it means that the probability of bankruptcy increases with the increase in the liquidity level of banks. In the test of the second sub-hypothesis, the coefficient of the explanatory variable of stable funds is negative and its relationship with bank financial helplessness is significant. Therefore, the second hypothesis that there is a significant relationship between stable funds and bank financial difficulties is accepted. In simpler words, it means that the probability of bankruptcy decreases with the increase in the level of stable funds of banks.

Keywords: liquidity coverage ratio, bank distress, liquidity risk, securities.

1-1- Introduction

In the contemporary world, banks play a significant role in the development of economic systems and also in economic exchanges. Because today, economic growth, increase in welfare and improvement of the standard of living in any country is done by the amount of investments that are actually made through the collection of deposits and savings of people through the banking network. Factors such as the industrialization of societies, expansion and transformation in social activities and as a result, the emergence of new needs have been important and effective factors in the creation and expansion of financial institutions, but economic development and progress are also one of the most important factors in the expansion and transformation of these institutions. In fact, financial institutions have been formed to facilitate the progress of other economic institutions. (Raymondpi, 1986, p. 7). After the Islamic Revolution, with the elimination of private banks, all banking groups were managed under the supervision of the government, but they have more or less competed with each other in banking activities. Today, apart from the competition between the state banking groups, the existence and creation of new private banks, new financial and credit institutions, as well as the expansion of the scope of activities of Qarz al-Hasnah institutions have also become the reason for the elimination of the monopoly market of the early years of the revolution in the country's banking system, and for the banks to be placed in a completely competitive environment. (Raymondpi, 1986, p. 7). Maintaining insufficient amounts of liquidity puts the bank at risk of not being able to meet its obligations and, as a result, bankruptcy. Holding large amounts of liquidity is a special type of inefficient allocation of resources that reduces the bank's profitability rate to people's deposits and as a result lose the market. Liquidity management means the bank's ability to fulfill its financial obligations over time. Liquidity management takes place at different levels. The first type of liquidity management is done on a daily basis and the required liquidity is forecasted periodically in the coming days. The second type of liquidity management, which is based on cash flow management, predicts the required liquidity for longer intervals of six months to two years. The third type of liquidity management examines the liquidity required by the bank in critical situations. Liquidity risk includes the risks caused by the lack of liquidity in a future period. But often, it is not seriously addressed until a serious crisis occurs or, at best, until warning signs are observed before the crisis occurs. Because the main reason for the trouble of banks around the world in the recent crisis can be found in their careless and overly ambitious management and leadership; The discussion of risk management has gained special importance during the recent crisis.

1-2- Statement of the problem

The number and severity of liquidity difficulties during the financial crisis of 2007-2009 prompted the law makers to strengthen the framework of liquidity standards by proposing two new liquidity risk standards by emphasizing liquidity risk management in December 2010. One of these standards is the Liquidity Coverage Ratio (LCR) standard, which requires banks to have more quality liquid assets in a sufficient amount for their survival under the pressure scenario within a month. While in the second standard, the net ratio of stable funds is emphasized, the things that can be deduced from it are that banks should perform their activities based on more stable sources of funds with financial support. This research aims to provide answers to some important questions regarding the new international liquidity standards. First, while the new liquidity risk ratios provide additional methodologies for coverage ratios and net cash assets, they provide components and assumptions that are generally untested. Therefore, empirical evidence supports whether the new ratios provide better indicators for bank liquidity risk than other additional liquidity risk measures such as current ratio, government bond ratio, and intermediary deposit ratio. Secondly, since the recent theoretical researches raise important points of view on the causes of liquidity risk or the escalation of financial crisis, empirical studies have tested the link between bank failures and liquidity risk. Therefore, this research tries to test the relationship between banks' helplessness and the new criteria and the third type of liquidity risk.

1-3- Importance and necessity of research

In the contemporary world, banks play a significant role in the growth and development of economic systems as well as in economic exchanges. Because today, economic growth, increase in welfare and improvement in the standard of living in any country is done by the amount of investments that are actually made through the collection of deposits and savings of people through the banking network. Factors such as the industrialization of societies, expansion and transformation in social activities and as a result, the emergence of new needs have been important and effective factors in the creation and expansion of financial institutions, but economic development and progress are also one of the most important factors in the expansion and transformation of these institutions. The trend, in fact, financial institutions have been formed to facilitate the progress of other economic institutions. (Panahian, 1382, p. 42) Private banks in the country are getting bigger, and with the bigger banks, the issue of control in various fields, including risk, becomes especially important. Therefore, policies should be such that the future movement of the bank, possible problems and possible solutions to solve them are identified and studied. In this regard, and in order to identify the problems related to financial helplessness and bankruptcy from the perspective of liquidity risk, it is investigated and identified possible solutions in this connection. (Zarei, 2014). New Basel.

Sub-objectives

Determining the relationship between bank financial difficulties and the liquidity coverage ratio.

Determining the relationship between bank financial difficulties and the ratio of net stable funds.