Iranian Journal of Finance

Abstract Banks play a vital role in the economy by offering various financial services. One of their core functions is channelling surplus funds from units with excess resources to those with deficits, even when the latter have viable investment opportunities. This intermediary role is particularly crucial in developing economies, where capital markets are often underdeveloped and limited in scope. This study focuses on one of the most essential functions of banks—liquidity creation. Liquidity is generated when banks transform liquid liabilities into illiquid assets. While this process is fundamental to banking operations, it also introduces potential risks, especially when liquidity levels decline. In such cases, banks may become vulnerable to liquidity and credit risks. The capital adequacy ratio (CAR), disclosed in financial statements, serves as an important indicator of a bank’s resilience and its capacity to absorb losses and manage financial risks. This study investigates the relationship between liquidity creation and CAR using data from a sample of banks over the period 2011–2019, incorporating several control variables. The results support the financial fragility–crowding out hypothesis, indicating a negative relationship between liquidity creation and capital adequacy. Among the control variables, the deposit-to-asset ratio, non-interest income ratio, and bank size negatively influence CAR. In contrast, return on assets (ROA) shows a positive association, enhancing capital adequacy.

Abstract The concept of liquidity creation has received much attention in project financing, as increased liquidity facilitates easier access to financial resources for long-term projects (Berger & Bouwman, 2009). However, the liquidity creation process is often accompanied by risk. Despite its advantages, if not managed properly, it can cause problems for the banking system and even the entire economy. On the other hand, capital is considered an influential variable in risk management, which helps the bank control challenging conditions. In this regard, the present research was conducted to investigate the moderating role of capital in the relationship between liquidity creation and failure risk, and further tried to examine the role of the monetary policy adopted by the central bank, considering the macro effects of this variable. This applied research project examined the banks admitted to the Tehran Stock Exchange from 2012 to 2018. The results showed that by controlling the variables of interbank interest rate and the variety of loans and deposits, liquidity creation is significantly and directly associated with failure risk. Moreover, the findings confirmed the moderating role of bank capital in the relationship between liquidity creation and failure risk. However, the monetary policy adopted by the central bank revealed an insignificant effect on this relationship. Therefore, decision-makers should consider these factors in the decision process.