Analyzing the Long run Interrelation between Banking System and Real Sector Function in Iran Economic through Simulation of Capital Adequacy Index

In spite of large number of empirical and theoretical studies in analyzing the long run interrelationship between financial system and real sector components, there is still a strong dispute among economists. For analyzing the mutual interaction between bank institution and economic real sector, four hypotheses have been proposed: supply leading, demand following, feedback and independent hypothesis. This paper aims to introduce simulated index of capital adequacy in managing credit risk and soundness of banking system. Beside that the results of reviewing the loan balances paid by commercial and specialized banks as functional component of monetary system and growth rate as a real sector variable in the period of 1981-2010 in Iran, results show that there is enough support for this fact that monetary and real sector are independent and the forth hypothesis will accepted. Base on impulse response function, there is weak evidence regarding the verification of supply leading hypothesis in predicting the interaction between financial and real sectors. The result has shown that changes in the banks granted facilities has not followed bank capital adequacy as a standard item for managing credit risk.

Capital Adequacy Index, Banking System Health, Economic Performance, Bank Loans