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The Impact of Exchange Rate Changes on Bank Lending: A Case Study of Iranian Banking System

Hassanpour, Mohammad Reza | 2021

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 54062 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Mahmoodzadeh, Amineh; Madanizadeh, Ali
  7. Abstract:
  8. We show evidence of a new mechanism in the lending channel via changes in the exchange rate on the loan supply. Changes in the relative risk or return of banks' balance-sheet items induced by exchange rate fluctuations can modify the level and composition of loans. Using a monthly panel of Iranian banks during 2007-2018, we find that a one percentage point increase in the exchange rate reduces loan supply by 0.05 percentage point. We consider this effect a sign of a change in the supply of loans since banks' responses to the exchange rate fluctuations differ depend on their health conditions. The impact is more remarkable for banks with higher illiquidity, non-performing loans, and foreign exchange positions. The effect on loan supply will be substantial in currency crises when the exchange rate growth is sometimes tremendous. Our results also represented that banks' sensitivity to the exchange rate growth differs among types of loans. The growth rate of loans in local currency, given to the private sector, and Musharakah contracts mitigate more in response to the rising exchange rate. The results are robust to changes in regression models, variables inclusions, and data frequencies
  9. Keywords:
  10. Bank Health ; Liquid Ratio ; Price Volatility ; Bank Loan ; Exchange Rate Fluctuations ; Lending Channel ; Exchange Rate Growth ; Loan Supply

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