Effects of Changes in the Exchange Rates on the Bank's Profitability in Short-Term and Long Term: VECM Approach

In consideration of the importance of foreign exchange rate changes in the bank's operations and their profitability, we have attempted to examine the effect of changes in the exchange rates on the bank's operations and their short-term and long-term profitability. In this respect, we have applied Error Correction Model to measure this effect. The related data have also been extracted from exchange rate lists and balance sheets of one of the Iranian commercial banks during 2005-2010. In order to enter and analyze raw data, E-views software has been used. Test results show that changes in exchange rates have a negative effect on the foreign exchange profitability of banks. While, foreign exchange position has a negative effect on profitability. Also, according to the adjustment coefficient, in presence of shock, the model almost takes about 25 days to reach equilibrium.