Investigating the Effect of Business Cycles on Resource Consumption and Combination of Iranian Public and Private Banks (2005- 2013)

Document Type : پژوهشی

Authors

• Mostafa Dinmohammadi
• Amir Jabbari
• Fahmideh Ghorbani

Zanjan

https://doi.org/10.22067/pm.v24i14.54117

Abstract

Introduction
In developing countries with less developed financial markets, banks are important institutions that act as financial intermediary and by providing a variety of ways reduce investment risk because one of the major obstacles to economic growth in developing countries is lack of capital resources and non-desirable use of existing ones. On the other hand, each dynamic economy requires steady flow of investment for continuity of its growth and development. The main responsibility of banks are absorption of resources to transfer them to the owner of business and economic activities.
Any shocks to economic system directly affect bank's activities; for example, high inflation and extreme price fluctuations directly or indirectly affect operation costs and cost of money as well as ultimate bank profits. This paper studies the relationship between resource consumption and combination of and business cycle and other macroeconomic variables.
Methodology
By combining time-series and cross-sectional data, panel data are created to obtain more information, more variability, less co-linearity among variables, more degree of freedom, and more efficiency.
According to purpose of this study (i.e., investigating the effect of exogenous variables on resource consumption and combination in active Iranian banks during 2005-2013) dynamic panel data is used. In this model, the effect of internal variables of banks appears as the performance variable of the previous cycle, and the effects of macroeconomic variables, as exogenous variables, are analyzed.
Many economic relationships are dynamic in nature and one of the advantages of panel data is to allow researchers to identify the dynamics between variables.
Also, for business cycles, Dummy variables are used where boom cycles are equal to 1 and recession cycles are equal to 0.
This study has employed four models; three models are related to resources combination and one model is related to resource combination. Each of these models is estimated by Dynamic Panel Method, separately.
Results and Discussion
The model presented in this study for the cycles 2005-2013 and with significance level of 5% has the following results:
The results of combination of bank resources models
The lagged dependent variables have positive and significant relationship with dependent variables in all models.
The business cycle variable has negative and significant relationship with short - term deposits and this relationship for flow and long-term deposits is positive and significant.
To examine the ownership type, Dummy variables is used (private=0, public=1); results show this variable is not significant in three models.
Inflation rate has positive and significant relationship with long - term deposits but this relationship isn't significant for flow and short - term deposits.
The relationship between share of private sector investment and short - term deposits is not significant. This relationship for flow and long - term deposits is negative and significant.
The results of usage model
The lagged dependent variable has positive and significant relationship with dependent variable.
The relationship between business cycle and usage of banks is positive and significant.
The Dummy variable ownership type does not have significant relationship with usage of banks.
The relationship between inflation rate and usage of banks is not significant.
The relationship between share of private sector investment and usage of banks is not significant.
Also, shares of public sector investment and usage of bank do not have significant relationship.
Conclusion
Results show that the most effective factors in terms of short-term deposits are internal factors of banks. Regarding external factors, the most effective factors on banks’ consumption are long-term and flow deposits.
During the boom cycles, with business and production growth, real income increases. People become two groups: producers and consumers. During boom cycles, the first group needs high liquidity and working capital, hence, the share flow deposits increase in order to obviate trading requirements. During boom cycles, real income increases, and results in higher social consumption and welfare increase as well. Because Iranian people encounter with many uncertainties and risks, people prefer saving their money as long - term deposits so as to reduce risk and uncertainty and gain profits, too. However, share of short - term deposits decreases in favor of current and long - term deposits.
The relationship between business cycles and bank consumption is positive. That is, during boom cycles bank loans increase as a result of economic activities and increasing demand for capital.
In conclusion, the relationship between business cycle and long – term deposits is positive which means increased long – term deposits share during boom cycles; thus, banks take the advantage of this situation and increase their profit.

Keywords

• banks activities
• business cycle fluctuation
• Panel Data Model
• GMM method

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