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With the application of the two-tier capital agreement and the introduction of the three-tier capital agreement, the discussion of the role of banks’ capital in the monetary transfer mechanism and banks’ lending decisions has become more important. In this regard, in this research, the effect of the legal requirements of the Basel III Agreement on the lending power and financial stability of the banking sector in Iran has been investigated using the system of simultaneous equations. For this purpose, the data from 19 selected banks and financial institutions were used during the period of 2011-2019. The findings of the research showed that the legal requirements of Basel III had negative and significant effects on bank lending. It was also observed that the legal requirements of Basel III had positive and significant effects on the financial stability of banks. [ABSTRACT FROM AUTHOR]