Explaining the role of banks' market power (competition) on liquidity creation in the condition of oil price shock

Abstract

The current paper aims to explain the role of banks' market power in creating liquidity during an oil price shock. The sample population of this study includes Iran's commercial and specialized banks whose information is available from 2011 to 2021. To test the research hypotheses based on the multiple regression method, the data were analyzed using Eviews 10 software after checking the data's validity and the regression analysis assumptions. The Lerner index was used to measure the bank market power variable as the research's independent variable. The inverted index of stable funding net ratio based on Basel 3 liquidity requirements was used to measure the study's dependent variable, liquidity creation. Furthermore, the negative changes in oil prices were considered oil price shocks, which is the moderating variable of the present study. The results showed that bank market power has a positive and significant effect on the creation of bank liquidity at the confidence level of 90%, which means that with a high market power, banks tolerate more liquidity risk. Besides, the results indicate that the oil price shock has a negative and significant effect on bank liquidity creation at the level of 90\%; Oil price shock does not influence the relationship between bank market power and liquidity creation. Therefore, banks with high market power tolerate more liquidity risk, and market power can significantly impact economic growth through its effect on creating liquidity.