Financial and Banking Strategic Studies

Designing a model for bank funding and market power and their impact on liquidity creation with monetary policy as equalizer

Document Type : Original Article

Authors

Majed Khezri 1
Amir Farahani 2
Sobhan Jooybar 3

1 Department of Economics and Management, Science and Research Branch, Islamic Azad University, Tehran, Iran.

2 Department of Economics, Faculty of Humanities, Sanandaj University, Sanandaj, Iran.

3 Department of Decision and Operations Management, School of Industrial Management, School of Management, University of Tehran, Tehran, Iran.

https://doi.org/10.22105/fbs.2025.502662.1150
Abstract
Purpose: The primary objective of this paper is to represent an econometric model based on market power and bank financing methods, analyzing and estimating the impact of these two variables while considering monetary policy as a moderating factor. In this process, achieving secondary objectives such as calculating the market power index, assessing the financing methods of selected banks, and determining an appropriate indicator for monetary policy is essential.
Methodology: This study follows an independent paradigm introduction approach. A group of publicly traded banks was selected, and using annual financial statement data, the translog production function was estimated, followed by the calculation of the Lerner index for each bank. The monetary conditions index in this research was derived using a time-series regression model. The bank liquidity creation model was formulated based on the market power index, bank financing methods, and the monetary conditions index. The effect of each of these variables on liquidity creation was then measured.
Findings: The results indicate no significant relationship between bank liquidity creation and non-deposit financing methods. However, a strong negative correlation exists between market power and liquidity creation, highlighting the need for banks to enhance market power and diversify revenue sources.
Originality/Value: This is the first study in Iran that simultaneously examines the impact of financing methods, market power, and monetary policy on bank liquidity creation.

Keywords

Bank financing
Monetary conditions index
Lerner index
Market power

Subjects

[1] Shariatinia, M. H., & Qavam, M. H. (2023). Identification and ranking of jurisprudential-legal and economic-financial challenges and harms of private sector banking in the banking network of the Islamic republic of Iran. Quarterly journal of islamic finance, 12(2), 309-344. https://doi.org/10.30497/ifr.2022.242166.1681
[2] Abdi, E., Khodadad Kashi, F., Mousavi Jahromi, Y. (2018). the effect of market power changes in the banking industry on firms investment with emphasis on financial constraints channel. Journal of economic growth and development, 9(34), 59-76. (In Persian). https://doi.org/10.30473/egdr.2018.5089
[3] Haghighi, M. . M. N. (2017). Analysis and ranking methods of financing bank by using instrument’s capital market; by the AHP approach. Scientific quarterly - promotion of islamic economics and banking, 5 (17) ,77-96. (In Persian). http://mieaoi.ir/article-1-422-en.html
[4] Dang, V. D., & Huynh, J. (2022). Bank funding, market power, and the bank liquidity creation channel of monetary policy. Research in international business and finance, 59. https://doi.org/10.1016/j.ribaf.2021.101531
[5] Moshiri, S. . V. M. (2010). Study of the monetary policy transmission mechanism and its timing in Iran. Journal of economic modelling, 4(1), 1-32. (In Persian). https://www.sid.ir/paper/176175/en
[6] Fairlie, J. A. (1935). The Encyclopedia of the Social Sciences. American political science review, 29(2), 286–289. https://doi.org/10.2307/1947510
[7] Guthmann, H. G., & Dougall, H. E. (1955). Corporate financial policy. The american finance association. https://www.google.com/books/edition/Corporate_Financial_Policy/UEweCsJqtAgC?hl=en
[8] Sophocles, N., Brissimis Manthos, D. & Maria Iosifidi, D. (2014). Bank market power and monetary policy transmission. International journal of central banking, international journal of central banking, 10(4), 173-214. (In Persian). https://ideas.repec.org/a/ijc/ijcjou/y2014q4a6.html
[9] Mohtashami, S., Sepehrdoust, H., & Fotros, M. H. (2024). The effect of financial policies on iran’s macroeconomic variables: evidence from bayesian structural vector autoregression model. Quarterly journal of applied economics studies, 13(50), 9–44. (In Persian). https://doi.org/10.22084/aes.2023.27202.3539
[10]  Gholizadeh, M. H., Akbari, M., Farkhondeh, M., & Habibi, M. (2021). The effects of income diversification on market power in the Iranian banking system. Journal of asset management and financing E, 9(3), 89–104. https://dor.isc.ac/dor/20.1001.1.23831189.1400.9.3.1.2
[11] Friedman, M. (1968). The role of monetary policy. American Economic Review (Vol. 58). https://www.aeaweb.org/aer/top20/58.1.1-17.pdf
[12]  Caglayan, M., & Mouratidis, K. (2022). Monetary Policy and Bank Liquidity Creation: A Multivariate Markov Switching Approach. https://ideas.repec.org/p/shf/wpaper/2022003.html
[13]  Rahimian, F., Sharifi Renani, H., & Ghobadi, S. (2021). The role of financial market stability on monetary policy transmission mechanism in Iran: A multivariate GARCH approach. Journal of asset management and financing E, 9(3), 37–64. (In Persian). https://doi.org/10.22108/amf.2021.126331.1618
[14] Casu, B., Di Pietro, F., & Trujillo-Ponce, A. (2018). Liquidity creation and bank capital, 56(3), 307-340. https://dx.doi.org/10.2139/ssrn.2828619
[15] Shahabi Shojaie, G., Rahnamay Rodposhti, F., Shahverdiyani, Sh. (2022). Provide a debt financing model for financial institutions and banks based on crowdfunding with a grounded theory approach. Financial knowledge of security analysis (financial studies), 15(54), 23-36. (In Persian). https://www.sid.ir/paper/1063225/en
[16]  Khodamoradi, S. . R. M. (2014). Designing a mathematical model for financing large scale companies. Journal of financial engineering and asset management, 5(19). (In Persian). https://civilica.com/doc/958727/
[17]  Baldo, L., Heider, F., Hoffmann, P., Sigaux, J. D., & Vergote, O. (2022). How do banks manage liquidity? Evidence from the ECB's tiering experiment. European Central Bank (ECB), Frankfurt a. M. https://doi.org/10.2866/613698
[18]  Nguyen, M., Skully, M., & Perera, S. (2012). Market power, revenue diversification and bank stability: evidence from selected South Asian countries. Journal of international financial markets, institutions and money, 22(4), 897–912. https://doi.org/10.1016/j.intfin.2012.05.008
[19]  Amidu, M., & Wolfe, S. (2013). The effect of banking market structure on the lending channel: evidence from emerging markets. Review of financial economics, 22(4), 146–157. https://doi.org/10.1016/j.rfe.2013.05.002
[20]   Kashyap, Anil, K., and Jeremy C. Stein. 2000. What Do a million observations on banks say about the transmission of monetary policy? American economic review, 90 (3), 407–428. https://www.aeaweb.org/articles?id=10.1257/aer.90.3.407
[21] Hojabr Kiani, K. (2015). Econometrics in practice. https://jqe.scu.ac.ir/article_19155_ef6c681982166d5524f45ab34fa45f71.pdf
Financial and Banking Strategic Studies
Volume 2, Issue 4
Winter 2025
Pages 250-266

Home

Indexing and Abstracting

Guide for Authors

Editorial Board

Submit Manuscript

Contact Us