Determining the effect of economic and financial variables on the ratio of bank facilities and deposits using smooth transition regression

The financial sector plays an important role in a modern economy by ensuring financial intermediation, i.e., the channeling of funds from savers to investors. A sound and efficient financial sector encourages the accumulation of savings and enables their allocation to the most productive investments, thus supporting innovation and economic growth. In Iran, banks are the main financial intermediaries. Banking credit is also used to finance the needs of households, in particular to smooth out their consumption pattern over time and help them invest in assets. Banks and financial institutions are essential in the funding process, and their major role cannot be ignored in the process of economic development; it is the most important portal executed by the state through its economic policies.The evolution of the banking sector is a key indicator of the vitality of the economic system. The role of banks in the business sector is clear through their various services which greatly help to promot economic and financial operations. However, the real role of commercial banks is measured by the primary functions of financial intermediation, accepting deposits and granting loans, which are addressed in the context of credit policies. One of the important goals of financial institutions, especially banks, is to create more efficiency in allocating resources and providing facilities. However, it should be noted that banks do not operate in a vacuum; their activities are mainly influenced by environmental factors, especially macroeconomic factors, which can be taken into account when making decisions on the country's monetary policy. The innovation of the present study is the use of a non-linear approach to investigate the effect of financial and economic variables on the performance of the banking system regarding bank facilities and bank deposits.

The purpose of this paper was to investigate the effect of financial and economic variables on bank deposits and facilities. To investigate this issue, the logit smooth transition regression (LSTR) model, which is one of the regime change models, was used with the statistical data of the 2011-2020 period for 15 banks admitted to the Tehran Stock Exchange.In this paper, among the set of economic and financial variables, inflation rate, economic growth, exchange rate, bank deposit rate, facility rate, the volume of facilities, deposits of the previous period and the volume of bank capital were selected as the best exogenous variables whose dynamics were already identified. LSTR model is a nonlinear econometric model that is able to capture the movement of some economic variables and adjust them every moment based on the behavior of economic agents. The main advantage of LSTR models is the assumption that the changes in economic aggregates are influenced by changes in the behavior of many different agents and that it is highly unlikely for all the agents to react simultaneously versus certain economic signals.

The results obtained from this study showed that the inflation rate variable leads to non-linear relationships among the variables of GDP, exchange rate, capital and bank assets, interest rate of deposits and facilities, volume of deposits and bank facilities. In the estimated model, it was observed that, if the inflation growth rate per year is more than 10%, the impacts of the research variables on the volume of deposits and bank facilities will be different. In addition, the obtained results indicated that the variables of economic growth, exchange rate, deposit rate and facility rate had non-linear and different effects on bank deposits and facilities. Based on the results, the transmission variable considered in this study in the regime with high fluctuations has high co-movement with the fitted values of the model. In fact, considering the conditions mentioned in the model, Periods 1 to 20 and 40 to 70 were under the regime with high fluctuations, and periods 20 to 40 and -70 to 80 were under the regime with low fluctuations.

According to the results of the research, monetary and macroeconomic variables strongly affect the volume of deposits and facilities in Iran's banking network. This means that, with the change in the inflation rate, the exchange rate, the deposit rate and the bank facility rate change too. Therefore, the monetary authorities can change the amount of money by changing the monetary instruments and have a great impact on the deposits and facilities granted by the country's banking network. In this regard, the independence of the central bank from the government along with the development of policy tools for the monetary authority in order to prevent the imposition of the results of the government's budget policies on the monetary policies of the central bank is a way of making the monetary policies efficient in medium and long terms.