Modeling Liquidity Risk Management in Banking Using System Dynamics Approach

Subject Areas : Financial and Economic Modelling

Seyyed Yahya  Asadollahi ¹ (Department of Accounting, Kermanshah Branch, Islamic Azad University, Kermanshah, Iran.)
Ali Asghar  Taherabadi ² (Department of Accounting, Kangavar Branch, Islamic Azad University, Kangavar, Iran.)
Farhad  Shahveisi ³ (Department of Accounting, Razi University, Kermanshah, Iran)
Farshid  Khairollahi ⁴ (Department of Accounting, Razi university, Kermanshah, Iran.)

Received: 2020-05-13 Accepted : 2020-09-16 Published : 2021-07-01

Keywords: Managing liquidity risk, Liquidity Risk, System Dynamics,

Abstract :

Banks as one of the most important and crucial economic sectors in each country play a significant role in economic growth and development and they face various risks one of which is liquidity risk. Managing liquidity risk is of great importance and identifying its effective factors is more vital. The present study aims to pre-sent a dynamic model to manage liquidity risk. System dynamics is used to find a risk making structure and present the most effective solution to manage it. In this method, by providing a mathematical model, simu-lating the results of various scenarios is possible. The results of implement-ing four scenarios on the model were simulated and analyzed. The results revealed that reducing legal deposits and nonperforming loans and increasing attraction of deposits is influential in banks liquidity risk.

References:

[1] Abbasi, E., Bastan, M., Ahmadvand, A., A system dynamics model for mobile banking adoption, Paper presented at 12th International Conference on Industrial Engineering of Iran, 2016, P.1-9, Doi: 10.1109/INDUSENG.2016.7519341, (in Persian).

 

[2] Ahmed, N., Ahmed, Z., Naqvi, I. H., Liquidity risk and Islamic banks: Evidence from Pakistan, Interdisciplinary Journal of Research in Business, 2011, 1(9), P.99-102.

 

[3] Al Janabi, M.A.M., Multivariate portfolio optimization under illiquid market prospects: a review of theoretical algorithms and practical techniques for liquidity risk management, Journal of Modelling in Management, (2020),  Doi:10.1108/JM2-07-2019-0178.

 

[4] Arab Mazar Yazdi, M., Baghomian, R., Kake Khani, F., Investigating the relationship between asset and debt composition and liquidity risk of banks in Iran, Journal of Auditing Knowledge, 2013, 13(52), (in Persian).

 

[5] Azar, A., Fallah Tafti, H., Systemic Thinking, Iran, Imam Sadegh University Press, 2013, (in Persian).

 

[6] Berger, A. N., Bouwman, C. H. S., Bank liquidity creation. The Review of Financial Studies, 2009, 22(9),  P. 3779-3837,  Doi:10.1093/rfs/hhn104.

 

[7] Bessis, J., Risk management in banking, 2nd Ed. West Sussex, United Kingdom: John Wiley and Sons, Inc, 2002.

 

[8] Bozorg Asl, M, Barzideh, F, Samadi, M., The Impact of Liquidity Risk and Credit Risk on Financial stabilityin the Iranian Banking Industry; Chandrak Regression Approach, Journal of Financial Knowledge Securities Analysis, 2018, 11(38), P.1-13, (in Persian).

 

[9] Chen, Y. K., Shen, C. H., Kao, L., Yeh, C. Y., Bank liquidity risk and performance, Review of Pacific Basin Financial Markets and Policies, 2018, 21(01), 1850007. Doi: 10.1142/S0219091518500078.

 

[10] Cherubini, U., Lunga, G. D., Liquidity and credit risk, Applied Mathematical Finance, 2001, 8(2), P.79-95.

 Doi: 10.1080/13504860110061013.

 

[11] Dolgun, M. H., Ng, A., Liquidity Risk Management in Islamic Banks: Evidences from Malaysia,  Islamic Monetary Economics and Institutions, Springer, 2019.

 

[12] Eivazloo, R, Agham Mohammad Samsar, M., Rameshg, M., Investigating the factors affecting non-current facilities in Iranian banks, Risk Modeling and Financial Engineering, 2016, 1(1), P.37-57, (in Persian).

 

[13] El-Massah, S., Bacheer, S. M., Al Sayed, O., Liquidity Risk in the Mena Region Banking Sector: Does Bank Type Make a Difference?, The Journal of Developing Areas, 2019, 53(1), Doi: 10.1353/jda.2019.0009.

 

[14] Fayyaz, A., Managing risk in financial sector, In M.S. Umer Eds.2006. Managing risk in financial sector. Karachi: The Institute of Bankers Pakistan, 2006,  P. 87-97.

 

[15] Ferdowsi, M., Fotros, M., Effects of credit risk and liquidity risk on banks' performance, Risk Modeling and Financial Engineering, 2017, 2 (1), P.22-41, (in Persian).

 

[16] Galletta, S., Mazzù, S. Liquidity Risk Drivers and Bank Business Models, Risks, 2019, 7(89), Doi: 10.3390/risks7030089

 

[17] Ghaderi, A., Systematic thinking and the art of modelling, Strategy Magazine, 2014, 24(31), P. 5-74, (in Persian).

 

[18] Ghasemi, S., Sarlak, A. Investigating the Impact of the Financial Crisis on Conservative Accounting and Transparency of Banking Information. Advances in Mathematical Finance and Applications, 2018, 3(3), P. 53-68,

Doi: 10.22034/amfa.2018.544949.

 

[19] Haerinasab, Z., Sohaili, K., Fattahi, S. The Relationship Between the Facility Interest Rate and Three Main Variable of the Money Market In Iran (1986-2017). Advances in Mathematical Finance and Applications, 4(3), P. 15-29. Doi: 10.22034/amfa.2019.581222.1151.

 

[20] Hanifi, F., Rahmanipour, S., Factors affecting liquidity risk in the banking industry, Business Management Quarterly, 2012, 3(13), P. 56-37, (in Persian).

 

[21] Hassan, M. K., Khan, A., Paltrinieri, A.,  Liquidity risk, credit risk and stability in Islamic and conventional banks, Research in International Business and Finance, 2019,48, P.17-31.

Doi:10.1016/j.ribaf.2018.10.006.

 

[22] Hekimoğlu, M., Barlas, Y., Sensitivity analysis for models with multiple behavior modes: a method based on behavior pattern measures, System Dynamics Review, 2016, 32(3-4), P.332-362. Doi: 10.1002/sdr.1568.

 

[23] Ismailpour, Y., A Study of Factors Affecting Banks' Liquidity Risk in Iran's Economy, Paper presented at the National Conference on New Approaches in Management and Accounting, Iran, 2017. (in Persian).

 

[24] Ismailzadeh, A., Javanmardi, H., Designing a suitable model for liquidity management and forecasting its risk in Bank Saderat Iran, Financial Economics, 2017, 39(11), P.171-191, (in Persian).

 

[25] Izadikhah, M., Khoshroo, A., Energy management in crop production using a novel fuzzy data envelopment analysis model, RAIRO-Oper. Res., 2018, 52 (2), P. 595-617, Doi: 10.1051/ro/2017082

 

[26] Kafayi, M., Rahzani, M., Investigating the effect of macroeconomic variables on the liquidity risk of Iranian banks, Journal of Economic Research and Policy, 2017, 25(81), P.261-310, (in Persian).

 

[27] Kao, M., Lin, C., Hsu, P., Chen, Y., Impact of the financial crisis and risk management on performance of financial holding companies in Taiwan, World Academy of Science, Engineering and Technology, 2011, 50, P. 413-417.

 

[28] Kapadia, S., Drehmann, M., Elliott, J., Sterne, G., Liquidity risk, cash flow constraints, and systemic feedbacks, In Quantifying systemic risk, University of Chicago Press, 2012, P. 29-61.

 

[29] Khosh sima, R, Shahikitash, M., The Impact of Credit, Operational and Liquidity Risks on the Efficiency of the Iranian Banking System, Journal of Planning and Budgeting, 2012, 17(119), P. 69-95, (in Persian).

 

[30] Lee, L., Green, E., Systems Thinking and its Implications in Enterprise Risk Management, Journal of Information Systems, 2015, 29(2), P. 195-210.  Doi: 10.2308/isys-51047.

 

[31] Li, Q., The Impact of Liquidity Risk of Commercial Banks on Systematic Risk of Banking Industry: Study of 16 Listed Commercial Banks, Modern Economy, 2019, 10(3), P. 645-665. Doi: 10.4236/me.2019.103044.

 

[32] Ly, K. C., Shimizu, K., Funding liquidity risk and internal markets in multibank holding companies: Diversification or internalization? International Review of Financial Analysis, 2018, 57, P. 77-89, Doi::10.1016/j.irfa.2017.12.011.

 

[33] Maaka, Z. A., The relationship between liquidity risk and financial performance of commercial banks in Kenya, Unpublished MBA Project, 2013.

 

[34] Marozva, G., Liquidity and Bank Performance, International Business & Economics Research Journal, 2015, 14(3), P. 453-462,  Doi: 10.19030/iber.v14i3.9218.

 

[35] Mazreku, I., Morina, F., Misiri, V., Spiteri, V., Grima, S., Exploring the Liquidity Risk Factors in the Balkan Region Banking System, European Research Studies Journal, 2019, 22(1), P. 96-108. Doi: 10.35808/ersj/1409.

 

[36] Mehrabiyan, A., Seifipour, R., Pathology of Current Demands in the Iranian Banking System, Journal of Financial Economics, 2016, 10(36), P. 86-73, (in Persian).

 

[37] Mehrara, M., Bouhloulvand, E., Investigating the factors affecting liquidity risk in the banking industry based on the business approach: A case study of Iranian banks, Journal of Macroeconomics, 2016, 11(22), P. 37-13, Doi: 10.22080/IEJM.2017.9744.1468, (in Persian).

 

[38]  Mirab, p., Rabieh, M., Mashayekhy, A., Zandieh, M., Systematic Approach to Analysis of Clothing  Manufacturing Development in Iran, 2019, 27(89), P.331-372, (in Persian).

 

[39] Muriithi, J. G., Waweru, K. M., Liquidity risk and financial performance of commercial banks in Kenya, International Journal of Economics and Finance, 2017, 29(2),  P. 195-210, Doi:10.5539/ijef.v9n3p256.

 

[40] Musiega, M., Olwney, T., Mukanzi, C., Mutna, M., Influence of Liquidity Risk on Performance of Commercial Banks in Kenya, IOSR Journal of Economics and Finance, 2017, 8(3), P.67-75.

Doi:10.9790/5933-0803046775.

 

[41] Negash, D. W., Veni, P., Determinants of liquidity risk in selected commercial banks in ethiopia, International Journal of Advanced Research in Management and Social Sciences, 2019, 8(4), P.108-124.

 

[42] Nouri, P; Ghaderi, O., Madani Esfahani, M., Investigating the role of financial crises on key banking indicators,  Paper presented at 20th Islamic Banking Conference of Iran, 2009, (in Persian).

 

[43] Pastor, J.M., Efficiency and risk management in Spanish banking: a method to decompose risk, Applied Financial Economics, 1999, 9(4), P. 371-384, Doi: 10.1080/096031099332267.

 

[44] Safaei, B, Mosleh Shirazi, A., Mohammadi, A., Ali Mohammadloo, M., Presenting a systematic model for disseminating commercial soft technology in Iran's oil industry, Journal of Technology Development Management, 2018, 6 (3), P.41-70. Doi: 10.22104 / jtdm.2019.3028.2030, (in Persian).

 

[45] Saunders, A., Cornett, M., Financial institutions management: a risk management approach, 6th Ed. New York, USA: McGraw-Hill/Irwin, 2008.

 

[46] Scarborough, M., A check-up for risk, ABA Banking Journal, 2011, P. 16-18.

 

[47] Schroeck, G., Risk management and value creation in financial institutions, Hoboken, USA: John Wiley and Sons, 2002.

 

[48] Sepahvandi, H., Dehghanpour, F., Liquidity Risk and Factors Affecting It in Banks and Financial Institutions: A Case Study of Kowsar Credit Institution, Paper presented at the 3rd National Conference and the 3rd International Conference on Management and Accounting in Iran, 2016, (in Persian).

 

[49] Shamas, G., Zainol, Z., Zainol, Z., The Impact of Bank’s Determinants on Liquidity Risk: Evidence from Islamic Banks in Bahrain, Journal of Business & Management (COES&RJ-JBM), 2018, 6(1), P.1-22.

Doi: 10.25255/jbm.2018.6.1.1.22.

 

[50] Sheikh, A., A Study of the Impact of Liquidity Risk and Credit Risk on Banking Stability Index and Bank Performance in Mellat Bank, Paper presented at 2nd International Conference on Management, Industrial Engineering, Economics and Accounting, Tbilisi-Georgia, 2019.

 

[51] Stan-Maduka, E.I., Operational risk management: determination of causal relationships and interdependencies of operational risk events, PhD thesis, University of East London, United Kingdom, 2010.

 

[52] Sterman, J. D., Appropriate summary statistics for evaluating the historical fit of system dynamics models, Dynamica, 1984, 10(2), P.51-66.

 

[53] Tahir, W., Managing risk in financial sector, In M.S. Umer Eds.2006. Managing risk in financial sector. Karachi: The Institute of Bankers Pakistan, 2006, P. 01-14.

 

[54] Tavana, M., Abtahi, A. R., Di Caprio, D., Poortarigh, M., An Artificial Neural Network and Bayesian Network model for liquidity risk assessment in banking, Neurocomputing, 2018, 275, P.2525-2554.

 Doi: 10.1016/j.neucom.2017.11.034.

 

[55] Teymouri, E., Noor Ali, A., Valizadeh, N., System Dynamics-Applied Approach to Management Issues, Iran, University of Science and Technology Publications, 2014, (in Persian).

 

[56] Valipour Pasha, M., Liquidity risk management in banks: a conceptual framework, Trend Quarterly, 2014, 21(65), P.201-222. Magiran.com/p1373242, (in Persian).

 

[57] Van Greuning, H., Bratanovic, S. S. B., Liquidity Risk Management, Analyzing Banking Risk (Fourth Edition): A Framework for Assessing Corporate Governance and Risk Management, 2020, Doi:10.1596/978-1-4648-1446-4_ch8.

 

[58] Vikneswaran, S., Manual, O., Shi, C. H., Rashid, S. Z. A., Liquidity Risk Management and Financial Performance of Conventional Commercial Banks in Malaysia, 2020, International Journal of Psychosocial Rehabilitation, 24(2)., Doi: 10.37200/IJPR/ V24I2/PR200410.

 

[59] Vodova, P., Liquidity of Czech commercial banks and its determinants, International Journal of mathematical models and methods in applied sciences, 2011, 5(6), P.1060-1067.

 

[60] Yaacob, S. F., Rahman, A. A., Karim, Z. A., The determinants of liquidity risk: A panel study of Islamic banks in Malaysia, Journal of Contemporary Issues and Thought, 2016, 6, P.73-82.

 

[61] Yao, F., Zhang, M., Application Study on the Stress Test of Liquidity Risk Management of City Commercial Banks in Our Country, Paper presented at the International conference on Big Data Analytics for Cyber-Physical-Systems, 2019, Doi: 10.1007/978-981-15-2568-1_181.

 

[62] Yazdanpanah, A., Shakib Haji Agha, S., Factors affecting banks' liquidity risk: Bank Mellat case study, Journal of Financial Knowledge Securities Analysis, 2009, 3(3), P. 27-54, (in Persian).

 

[63] Zhang, J., He, L., An, Y., Measuring banks’ liquidity risk: An option-pricing approach. Journal of Banking & Finance, 2020, 111, 105703, Doi: 10.1016/j.jbankfin.2019.105703.

 

[64] Zamanian, M., Sadeh, E., Amini Sabegh, Z., Ehtesham Rasi, R. A Fuzzy Goal-Programming Model for Optimization of Sustainable Supply Chain by Focusing on the Environmental and Economic Costs and Revenue: A Case Study. Advances in Mathematical Finance and Applications, 2019, 4(1), P.103-123,

Doi: 10.22034/amfa.2019.578990.1134.