Investigating the Various Factors Affecting the Capital Formation of Banking Industry in Iran- An Application of Resilience Approach

In the systemic view¡ the term Resilience refers to “the preservation of system in the time of chaos”¡ and subsequently the Economic Resilience indicates per se¡ the ability of the economy to recover from an unexpected external shock¡ in toto. In this context¡ a sound banking system with low risk of default¡ solid capital reserves¡ and high rate of return which is pro rata¡ endowed with modicum degree of volatility and plausible rate of profitability¡ could potentially repulse any undue external shocks¡ Sine die. In this paper¡ an attempt is made to investigate de facto¡ the determinants of factors affecting the Equity ratio of 18 designated banks as a proxy for application of Resilience approach in the Iranian banking system for the sample period of 2005-2013¡ viz-a-viz¡ utilizing the Impulse-Response Model and Variance Decomposition Technique thereto. Meanwhile¡ we have specified the impact of GDP on capital formation of those banks under the study as supply shock and similarly¡ we have postulated the effect of liquidity as monetary shock¡ the impact of inflation rate as demand shock and also the amount of capital as another proxy for employing the resilience perspective in the economy¡ Ipso facto. However¡ to appraise the supply¡ money and demand shocks¡ we estimated the one standard deviation for each variable¡ de jure. The results prima facie¡ indicate that the amount of liquidity as monetary shock¡ bears the highest impact on capital formation of banks under the review¡ while the effects of demand and supply shocks on dependent variable have remained next to it¡ Sui generis. Thus¡ we conclude that¡ the monetary shock is the most effective and significant factor affecting on capital formation of banking industry that eventually can depict the outstanding resilience outlook in the time of crisis¡ and will bestow upon profound precedence¡ compared to demand and supply shocks¡ Sine qua non.