The effect of macroeconomic variables on banking industry stability

Document Type : Research Paper

Authors

1 Associate Professor, Department of Economics, University of Allameh Tabataba’i, Tehran, Iran

2 Ph.D. Student in Economics, University of Allameh Tabataba’i, Tehran, Iran

10.29252/jep.9.18.205

Abstract

This paper aims to consider the effects of macroeconomic variables on the stability of banks using the data from 17 banks during the period 1386-1391. For this purpose, the effect of macroeconomic variables such as interest rate, inflation and GDP growth rate on bank stability is measured. To obtain a composite index for bank stability, we calculate the weight average cost-to-total income ratio, bad debts-to-total debt ratio, net profit-to-total asset ratio, and loans-to-deposits ratio variables.  The results indicate that inflation has a significant and negative effect on the stability of the banks. The interest rate variable has a significant and positive impact on the stability, but the effect of GDP growth is significant and negative. This negative effect is because of the negative correlation between the GDP growth rate and the profits of banks. Also, the effect of Herfindal-Hirshman index, as a concentration index in the banking industry, is measured. This effect is positive but not significant.

Keywords

Main Subjects

References

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The Journal of Economic Policy
Volume 9, Issue 18
May 2017
Pages 205-229

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