Investigating the Impact of Liquidity Creation on Profitability and Financial Stability of Banks

If the central bank and the relevant bank risk committee do not monitor and control the amount of liquidity created by a bank, it risks bankruptcy and ultimately all the banks in the country. Therefore, this study examines the impact of liquidity creation on the profitability and financial stability of banks. In terms of purpose and method, this research is applied post-event. A multivariate regression model and data panel approach were used to analyze the information of 15 banks listed on the Tehran Stock Exchange over the period 2013-2020. Berger and Bauman's (2009) method was used to calculate the liquidity creation index and the profitability and financial stability of banks were measured by the return on assets ratio (ROA) and Z-Score, respectively, as well as by control variables at the bank level (size, deposits, facilities, and non-interest income) and industry level (concentration index of banks). According to the results, banks are more profitable and stable when liquidity is created.