Interaction Effects of Bank Risk, Capitalization and Inefficiency in Iran’s Banking System

Abstract

The main purpose of this paper is to investigate the interaction effects of risk, capitalization and inefficiency in Iran's banking system. For this purpose, combined data of commercial and private banks of Iran in years (1999-2012), were collected and analyzed using simultaneous equation approach and fixed effects two-stage least squares (FE2SLS), The results confirm the belief that these three variables are simultaneously determined. The results indicate that relationship between inefficiency with quality of loans is significant and positive. Capitalization and loan growth have positive effect on inefficiency. Capital accumulation will decrease quality loans. Capital accumulation also has negative effects on the quality of banking risk indicator.On the other hand ,due to the inefficiency of the banking system's cost and return on assets on capital accumulation, banks that aren't in a good position in terms of performance, are not in a right position in terms of equipping and capital accumulation either.

Keywords

• risk
• capitalization
• inefficiency
• simultaneous equation approach
• stochastic frontier approach
• moral hazard hypothesis
• bank