Degree of leverage ratio

The banks’ response to their changes in leverage ratios is examined and evaluated in this paper. This reaction can be interpreted as if the coefficient of total debts to equity (lev1) and total assets to equity (lev2) are positive as anticipated in the banking network of Iran. The paper uses data from 31 Iranian banks’ annual databases during the course of 2006-13 in order to estimate an empirical panel data model of banks’ balance sheet adjustment. We identify the leverage ratio degree to show that both equity and liabilities tend to adjust to move leverage positively without considering the state of the Iranian economy. On the other hand, the index of leverage coefficient conditioned by the state of the economy is negative which replicates that banks tend to experience a negative impact of leverage on the return to equity as a result of cost push due to higher ratio of assets to equity in the bust and inappropriate return on investment. Furthermore, the non-performing loans ratio coefficient is negative and significant which proves that one percent increase in the nonperforming loans has led to a less than one percent decrease in the return on equity ratio as expected, but the total loans to total deposits ratio depicts a negative-significant coefficient which denotes the higher non-performing loans have caused that loans ratio increase will not necessarily give rise to higher returns for the banks. Besides, the leverage ratio (lev2) is positive as expected and banks gain higher returns through higher leverage. However, the leverage measure’s coefficient conditioned by the state of the economy (dummy) is negatively significant owing to cost push from lower return on investment and higher ratio of assets to equity in the bust. JEL Classifications: C23, E32, E44, E51, G21, M20

This study examines the effect of regulatory policy on efficiency under prudential framework among banks listed in the Iranian Securities and Exchange Organization over the period 2003 to 2015. Arellano-Bond estimation method has been patronized to investigate the effect of regulatory policies on efficiency. Results indicate that regulatory policy indicator indexing reserve requirement on investment deposits has had a positive relationship with the efficiency ratio, Sum of Assets Circulation Ratio (SACR), although it is not meaningful. On the other hand, the legal reserve ratio is positively and meaningfully affecting efficiency in financial institutions. Leverage ratio is negatively and meaningfully affecting the efficiency ratio (SACR) which highlights the point that as the financial institutions heighten their leverage ratio, it will lead to lower sum of asset circulation ratio as the best indicator of efficiency under activity proportions. Higher risk will lead to higher Financial Cost to Net Profit ratio (FCNP) interpreted as lower efficiency in financial institutes. Furthermore, regulatory policy denoted by the legal reserves ratio with one lag interval negatively-significantly influences the financial cost ratio. JEL Classification: C81, E43, E65, G21, G23