Deposit Funding and Loan Volatility in Iranian Banking System

Banks may perform differently in lending to firms according to their funding structures. This paper surveyed the relation between loan volatility and deposits in Iranian banking system. The extent to which bank lending is connected to funding structure is affected by the banks’ characteristics such as capital structure, profitability, and the measure of non-performing loans. To analyze this relation, therefore, this survey employed the dynamic panel data of the banks. Using a unique dataset of Iranian banking system and the dynamic panel data it was found that loan volatility has a statistically significant effect on the deposits. Banks respond to loan shocks mainly by adjusting their deposits volumes. According to the results, loan volatility has negative effects on deposit ratio in the Iranian banking system.