Title: The effect of financial repression policy on bank liquidity risk (evidence from Central Bank of Iran)

Authors: Seyed Ehsan Hosseinidoust; Armin Saatian

Addresses: Department of Economics, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamedan, Iran ' Department of Management, Payame Noor University, P.O. Box 19395-3697, Tehran, Iran

Abstract: This study investigates the long-run effect of financial repression policies on liquidity risk in the Iranian banking sector during 2006 and 2018. As a method of econometrics, the autoregressive distributed lag (ARDL) approach is applied. Financial repression policies, in other words, the central bank's interventionist monetary policies have been assessed based on the endogenous money view using four indicators: the real interest rate, the legal reserve ratio, the unofficial exchange rate, as well as the bank credit to GDP ratio which can show the financial depth of an economy. The empirical results revealed that a rapid financial liberalisation policy could make the banking system riskier. Although the financial repression policies in the Iranian banking system have generally reduced the liquidity risk, the bank losses have been passed on through hidden taxes to depositors and domestic money holders, which illustrates the need for structural reforms in the Iranian banking system.

Keywords: financial repression; liquidity risk; endogenous money; real interest rate; credit to GDP ratio; exchange rate; legal reserve ratio; financial liberalisation; monetary policies; financial depth.

DOI: 10.1504/AAJFA.2022.126961

Afro-Asian Journal of Finance and Accounting, 2022 Vol.12 No.5, pp.574 - 593

Received: 21 Aug 2019
Accepted: 15 May 2020
Published online: 15 Nov 2022 *

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