The Effect of Exchange Rate Fluctuations on the Bank's Lending Power in Iran

Achieving sustainable economic development depends on economic growth and financial sector development in one country. Given the capital market in Iran, financing of various economic sectors is mainly done by the banking system. Banks are influenced by their environmental conditions and their lending behavior is often influenced by macroeconomic factors such as GDP, employment levels, inflation and exchange rates. Hence, banks adjust their lending behavior in response to these symptoms. Positive (negative) signs encourage banks to lend more (less). Therefore, identifying the factors affecting on granting credits in the banking system is very important.In this regard, the present study investigates the effect of exchange rate fluctuations on credits of specialized banks in Iran. In this way, Vector Autoregressive (VAR) model and seasonal data of 2000: 4-2017: 4 were used.  The results show that growth of credits ratio to bank deposits in confronting with exchange rate shocks, initially increases but decreases over a period. Response of growth of credits ratio in the face of inflation shock and GDP growth is negative and positive respectively. Variance analysis table showed that GDP growth rate has the most power to explain growth of credits ratio changes. The results confirm the research hypothesis. Because, the growth of credits ratio granted in the face of the shocks of exchange rate volatility initially increases and then, decreases after a period.