Comparison between the effect of full and partial reserve banking on the Iran's banking system's health : A game theoretic approach

Document Type : Original Article

Authors

1 Professor of the Islamic economics, Faculty of Economics, Tehran University, Tehran, Iran

2 PhD student in Faculty of Economics, Tehran University, Tehran, Iran

10.22034/es.2024.403493.1685

Abstract

Currently, Iran's banking system, as the main financing system of enterprises, doesn't have sufficient health. For example the NPLs in the banking system is 7.1%, and less than half of the banks satisfy the minimum capital adequacy ratio of 8%. But the central bank tolerates this situation and does not bankrupt them. Knowing this issue has caused banks not to pay enough attention to the managing the risks of lending and as a result has reduced the health of the banking system. It seems that the main reason for the central bank's forbearance is to prevent bank runs. In order to deal with this dilemma, full reserve banking can eliminate the possibility of bank run and therefore remove the main cause of central bank's passiveness. The latter improves the health of the banking system. In this research, the partial and full reserve banking system have been modeled using game theory. Results show that migration to the full reserve banking system can improve the health of the banking system in Iran and reduce various risks such as credit and liquidity risk.

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