Liquidity Coverage Ratio, Ownership, Stability: Evidence from Iran

The Basel Committee on Banking Supervision (BCBS), in response to the recent financial crisis, has developed new stability rules aimed at preventing financial crises in the future. This paper uses the new Liquidity Ratio (LCR) and attempts to determine the impact of this ratio on the stability of banking system. The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered high-quality liquid assets. The LCR will expand the banking sector’s ability to bear shocks arising from financial and economic stress. We find that liquidity coverage ratio as a requirement in the regulation develops bank stability. Specifically, banks with more liquidity coverage ratio are more stable. The role of banking ownership is also pursued as another goal in the paper. According to the results, there is the positive effect of the liquidity coverage ratio on stability in private banks and there are the negative effects of the liquidity coverage ratio on stability in state and specialist banks. We find that there is a difference between state banks and specialized banks with private banks. The state and specialized bank have more liquidity risk than private banks in Iran.