The Impact of Combined Liquidity Risk and Credit Risk on Financial Stability of Iranian Banking Industry

The relationship between different types of risk and their impacts on financial stability is very important for the banking industry. Due to lack of consensus regarding the relationship between these risks in the banking industry, especially the relationship among credit risk and liquidity risk, this study examines the simultaneous relationship among these two risks and their impacts on the financial stability of Iranian banks during the period of 2005-2014 by using panel data approach. For this reason, we have used the simultaneous equation modeling to test the relationship between liquidity risk and credit risk. Also, we have used the generalized method of moments (GMM) to assess the impact of these two risks on financial stability. Results show that, in general, liquidity risk and credit risk have a significant positive relationship with each other. Moreover, using GMM we found that these two types of risk negatively impact financial stability and increase the probability of bankruptcy of the Iranian banks.