Bank Capital

Considering the intermediary role of banks in the economy and their critical function in the propagation of economic shocks to the real sector, this study aims to investigate the role of bank capital in analyzing the relationship between banks' balance sheet characteristics and economic fluctuations using a Dynamic Stochastic General Equilibrium (DSGE) model. The results demonstrate that, in the model with a bank capital channel, positive shocks lead to more robust economic growth. This is attributed to the banks' ability to invest, enhancing the positive effects of shocks. Taking bank capital into account, variables such as consumption, and inflation exhibit better performance, with reduced fluctuations or quicker adjustments, leading to economic stability. Conversely, in an economic scenario without a bank capital channel, positive shocks have a lesser impact on economic variables. Consequently, the results can effectively inform decision-making regarding the necessity of adhering to bank capital adequacy ratios.

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.