The Impact of Bank Market Power and Income Diversification on Liquidity Creation by Using Panel Vector Auto Regression Approach

The purpose of this study is to investigate the effect of market power and income diversification strategy on liquidity creation. Thus, the data of 20 banks in Iran during the period 2016-2021 were collected from the financial statements and attached notes. For this purpose, the Panel Vector Auto Regression method has been used. In order to measure the liquidity creation index, Berger and Boehman's (2009) method has been used. Also, the market power in the bank system is measured by the Lerner index, for this, the translog random frontier function is used, and then the market power is calculated. To measure the income diversity index, the adjusted Herschmann Herfindahl index of income has been used. The results indicate that competition or market power has a significant negative effect on liquidity creation. The effect of non-interest income diversification strategy on liquidity creation was also confirmed. The results of the analysis of variance decomposition test show that in the long run, market power has more explanatory power on liquidity creation, so that market power has a greater share in explaining liquidity creation than the non-interest income diversification strategy.