The Effect of Macroeconomic Uncertainty on Bank's Lending in Iran

Banks make use of the interest rate spread (lending rate minus deposit rate) in order to generate their incomes and their lending behavior is mostly influenced by macroeconomic factors. Thus, this study aims to answer this question: how do banks alter their lending behavior in response to the growing macroeconomic uncertainty? For this purpose, a GARCH model is used to calculate economic uncertainty in macro level, and conditional variance of economic growth rate is included in an interbank panel data model as an indicator of macroeconomic uncertainty. Using data from 10 Iranian banks for the period 2006- 2014, the regression results show that an increase in macroeconomic uncertainty has a significant and negative effect on the ratio of loans to assets of banks.