A New Instrument for Destructing Money and Writing Off Illiquid Assets

The available evidence indicates an unhealthy flow of liquidity creation in Iran's banking system, that if it continues, it can be a very serious threat to create unbridled and uncontrollable inflations. Therefore, it is very important to adopt a solution for improving the situation before escalating crisis and creating uncontrollable instabilities. The proposed solution should be aimed at solving the existing disorder in the money destrucion process so that it can have corrective effects on the balance sheet structure of the banking system at all time frequencies, so that at the same time, in addition to increasing the quality of the assets on the right side of the banks' balance sheets, it also puts their shareholders’ equity in optimal conditions. Therefore, the main focus of this article is the explanation of a new financial instrument called CoCo securities that, while making the flow of liquidity healthy, can also protect the shareholders’ equity of banks with a special mechanism. These securities are hybrid and convertible instruments whose main purpose is to protect the banks' tier 1 capital adequacy in order to increase the banks' ability against incoming shocks. Based on this, in 6 different scenarios with 10 periods of balance sheet turnover in each scenario, in accordance with the Stock-Flow Consistent model, it has been investigated how these securities affect the process of creating liquidity and destructing money. In this regard, the results of modeling indicate that the mentioned securities effectively improve the process of destructing money and at the same time since it improves the shareholders’ equity of banks, it also increases the quality of the created liquidity and can be used as a complementary plan to achieve the goals outlined in the resolution of the precautionary policy to control the growth of the banking network's balance sheet.