The Effect of Exogeneous Shocks on Iranian Banks’ Lending Behavior

Abstract

In this paper, we empirically explore whether demand and supply shocks other than monetary policy or regulatory shocks can affect the banks’ lending behavior. Using a panel fixed-effect estimation on the monthly Iranian banking system data, we identify the effects of two shocks during the period of 2006-2012 on the banks’ behavior: International Sanctions, and the Embezzlement Scandal of 2011. Our goal is to assess the direct and indirect effects of these shocks on the supply of credit, as previous studies have indicated a fall in this particular variable. Results show that the discovery of embezzlements have had a direct negative effect on credit, while a direct effect is hardly visible to be coming from sanctions. The results from embezzlements affirm the powerful role transparency plays in the banking system.