Analysis of the Role of Central Bank in Reducing the Probability of Liquidity Risk in the Banking System of Iran

Bank liquidity increases the ability of banks in case of suddenly decreasing deposits and for the purpose of credit financing. The central bank as a policy-maker institution can play an important role in preventing a liquidity crisis, when the bank's liquidity risks have increased. One of the most important tools for central bank is liquidity injection in the banking system in a liquidity crisis. Since effectiveness of liquidity injection in reducing the probability of liquidity risk depends on the health status of the banks, in this paper we study the effect of liquidity injection on reducing liquidity crisis with a consideration for soundness of banking activities, using a a panel-logit model and balance sheet and income statement data for the period of 2006-2013. Results show that liquidity injection reduces liquidity risk and if one bank is more stable than other banks, it will have lower liquidity risk than others.