Investigating the Effect of Oil Price Shocks and Western Sanctions on Banks' Liquidity Creation: A Nonlinear Approach

Liquidity creation is one of the functions of banks based on the theory of financial intermediation. The purpose of this article is to examine the effects of oil price shocks and economic sanctions on the liquidity creation of Iranian banks, given the country's specific circumstances.

This study was conducted in a nonlinear framework using PSTR models.

Based on the achieved results of this study, the effects of oil price shocks and economic sanctions can be explained using the smooth transition threshold models. Negative oil price shocks have negative effects on the on-balance sheet liquidity creation as well as on the total liquidity creation of large banks but they have a positive effect on smaller banks. The effects of positive oil price shocks are only significant on the on-balance sheet liquidity creation of the larger banks. By examining the average oil price shocks, the results show that oil price shocks harm the liquidity creation of large banks but do not have a significant effect on smaller banks. Economic sanctions have a positive effect on the liquidity creation of large banks and do not have a significant effect on smaller banks.

Overall, the results proved that the effect of negative oil price shocks on banks' liquidity creation is more than the effect of positive oil price shocks and economic sanctions. In addition, mechanisms need to be established to offset its negative effects on banks.