اقتصاد باثبات (Jul 2023)
Evaluating macroeconomic shocks on banking stability with A Factor-Augmented Vector Autoregressive (FAVAR) Approach (case study: Iran's economy)
Abstract
The banking industry is considered one of the most important sectors of the country's economy, which can provide grounds for the growth and prosperity of the economy by organizing and properly managing its resources and expenses. Bank stability is important from different perspectives. Banking stability can indicate the structure of banking resources and the financing of bank assets.According to the literature of banking health and stability, basic capital can help banks to compensate for financial losses, and capital can be a factor that reduces the transmission of shocks and reduces the risk of banks' lending process. Although monetary and credit policies are a tool to stabilize the real sector of the economy and achieve sustainable economic growth, it is approved by the general economists and policy makers. However, macroeconomic shocks also affect the stability of the banking system. In this research, an attempt is made to use A Factor-Augmented Vector Autoregressive (FAVAR) Approach, with a relatively small scale, to evaluate macroeconomic shocks on banking stability. Recent studies indicate an increase in attention to models in which a wide range of economic information is used in their design. This has been made possible by supplementing traditional VAR models by using one or more factors. The impact of macroeconomic shocks on asset return variables, return volatility and bank capital have been investigated from bank stability Indicators. The results obtained, shock Inflation and exchange rate create a wave-like effect in the banking sector, which lasts for about 5 years in the banking sector, and on the other hand, the effect of inflation on this sector is longer and more lasting than the impact of the exchange rate shock.Extended Abstract:Introduction:The banking industry is considered one of the most important sectors of the country's economy, which can provide grounds for the growth and prosperity of the economy by organizing and properly managing its resources and expenses. Bank stability is important from different perspectives. Banking stability can indicate the structure of banking resources and the financing of bank assets. According to the literature of banking health and stability, basic capital can help banks to compensate for financial losses, and capital can be a factor that reduces the transfer of shocks and reduces the risk of banks' lending process (Ven Don Houl, 2021).The stability and stability of the banking system is one of the most important issues that is considered by economists and policymakers to stabilize the growth of an economy in the long term. In addition to destabilizing the financial sector, the instability of a country's banking system will also increase economic fluctuations. Therefore, the stability of the banking system is one of the factors affecting the GDP and economic growth of the country in the long term. The European Central Bank considers financial instability to be a situation where the existing financial system in a country, including financial intermediaries, markets and financial infrastructure, cannot withstand incoming economic shocks and cause disturbances in the functioning and functions of the financial system. . The impact of the instability of the banking system on the gross domestic product is far greater than its effect on the stabilization of the gross domestic product. In other words, it can be stated that the relationship between these two variables is direct and non-linear, that is, a decrease in banking stability will lead to a significant decrease in GDP, while stability and stability are the basis for an increase in GDP, but No, it will be the same. An increase or decrease in the stability of the banking industry affects the performance of banks, and this banking stability and instability can be caused by macroeconomic shocks, and the banking performance of the macroeconomic sectors of the country is also affected. It affects (Nazarian et al., 2016).Esoklarik et al. (2012), by investigating the identification of financial crisis, showed that high level of bank loans and financial leverage increase the probability of financial crisis. Goodhart and Hoffman (2008) presented theories about the two-way causal relationship between bank credit and macroeconomic shocks and showed that bank credit can have a direct theoretical relationship with monetary policies and that monetary policy It can also explain banking stability.With the above explanations, in addition to having an oil export economy, Iran potentially receives different effects from macroeconomic shocks, especially specific policies. The government sells foreign currency from oil exports to the central bank, as a result, when the government spends oil revenues in domestic currency and such revenues affect the reserves of the banking system, and assuming other factors are constant, the supply Money increases and actually starts circulating in the economy through the financial system. Similarly, when the central bank sells foreign currency, money leaves the economy. In contrast, monetary policy measures are not hard to define monetary conditions, which are actually determined by monetary, fiscal and foreign exchange effects (primary money creation). Because under this specific policy framework, macroeconomic shocks can be generated in an unconventional way and have an impact on the decisions of the financial system. Financial stability depends on the monetary conditions of the economy, which is the result of the evolution of the interest rate and the real exchange rate. Especially, the bad financial conditions that increase the interest rate and decrease the value of the national currency are the real factors for instability. In the first stage, these conditions are determined by political shocks that include unexpected financial and foreign exchange measures, as well as the internal response of these policies to other shocks. Macroeconomic shocks include structural shocks (three shocks). Total and two political shocks). Structural shocks are actually shocks that affect the structure of the economy, which affect banking stability (Carvallo et al, 2016).The process of financial stability or instability in the banking sector is not only affected by the decisions taken in the monetary and banking areas, with a direct impact on lenders, borrowers, the amount of savings, cost, profitability, efficiency and bank financial ratios. Accepted, but the macroeconomic shocks are the most important factors affecting the financial instability of the banking sector and ultimately the financial crisis of the countries. In the conditions of recession and prosperity, countries adopt different economic policies, each of which affects banking stability. On the other hand, with the increase in the inflation rate, the cost of money (real interest) has decreased, and this increases the willingness to receive loans, and this affects banking risk and stability in this sector. The increase in the unemployment rate and government budget deficit also causes the government to turn to expansionary policies and borrowing from banks in order to increase employment or reduce the government budget deficit, which can affect banking stability. In countries like Iran that follow the state banking system, banking stability is largely influenced by monetary policies, which are more than anything else influenced by the economic conditions of the country and the government. Usually, when facing a budget deficit, governments use expansionary monetary policy, which can lead to financial instability in the banking sector. Therefore, it is very important to know macroeconomic shocks on banking stability. Therefore, this study intends to examine macroeconomic shocks on banking stability.Method:In this research, the time series data of macroeconomic variables, banking stability from the period 1991 to 2022 have been used. The data used were selected based on the general classification of the study by Bernanke et al. (2005). This classification includes production, inflation, volume of money, oil revenues, exchange rate and bank stability, the data used are all annual and have been prepared through the central bank's time series database, it should be noted. Since it is necessary to estimate the factors using the generalized factor vector self-explanatory pattern, the variables are stationary, tests such as Dickey-Fuller's generalized unit root test and Phillips Peron's have been performed on the variables. It is necessary to explain, except for a small number of variables, all other variables are first-order accumulation and in most cases, the first-order difference of the logarithm of the variables is used in the model. The modeling of the self-explanatory model of the generalized factor vector is based on the study of Bernanke et al. (2005) and the estimation of the model using the expectation maximization algorithm is based on the study of Demsper et al. (1977) and Shamoy Stauffer (1982).It can also be said that there are several methods for measuring risk factors in the theoretical literature. A number of researchers, such as Butch et al. (2014), used the ratio of overdue loans, while Angiloni and Faia (2009) used Market-based criteria use the Z-score index by default. To measure the banking crisis, the Z-score index and the standard deviation values of asset returns are used. The Z-score measure calculates bank data, returns and fluctuations. Theoretically, Z-scores are inversely related to the probability of default, i.e. the probability of an equal footing for bank failure is sufficiently reduced. Therefore, low Z-score values indicate instability and higher probability of non-payment. The second method for measuring risk factors, cross-sectional standard deviation of asset returns (DEVROA), tries to capture the systematic fluctuations of returns (Lepetit & Strobel, 2019). In this regard, the Z index has been used in this article to measure bank stability: Where z-score is bank stability, RGDP is economic growth, INF is inflation rate, UNP is unemployment rate, EXP is exchange rate, OIL is oil revenues and DEF is government budget deficit (surplus). The second model of this article is based on the study of Bernanke et al. (2005), which evaluates the effect of macroeconomic shocks on banking stability, considering that the purpose of this article is to investigate the impact of macroeconomic shocks on banking stability, so The variables of the vector X_t should be chosen in such a way that they represent these three concepts. The data used are annual and have been prepared through the time series database of the Central Bank. The time range of the data includes the years 1991 to 2022. On the other hand, due to the uncertainty of the research variables, to avoid these problems related to the uncertainty of these variables, their growth rate has been used. In this way, the components of equation can be rewritten in the form of equation as follows: Using the estimation of the above equation, the factors or are estimated. Then the final equation will be estimated, which is actually a combination of factors as well as exogenous policy variables. Based on what was stated in the previous section, the number of factors used will be 3 factors. To estimate the final equation, the variables in the vector must first include the variables that represent macroeconomic shocks. In many studies, two variables of oil revenues and exchange rate are usually used to specify and explain macroeconomic shocks in VAR models. What is considered important is that these two variables are exogenous to the banking sector, while they are determined outside of this sector and mainly by policy makers. Therefore, the vector will include two variables, oil revenues and exchange rate, and the growth rates of these two variables have been used to avoid the problems caused by variable indeterminacy. Where _t and respectively are the inflation rate and exchange rate which actually form the vector and and B respectively are exogenous variables (inflation and exchange rate) and coefficients related to these are the variables.Results:In this article, an attempt was made to estimate a self-explanatory vector model of generalized factor with small scale to evaluate the impact of macroeconomic shocks on banking stability. The small number of variables in conventional and traditional VAR models creates two basic problems in analyzing the effects of shocks on the economy, firstly, the information available in economic statistics is not used efficiently, but only a limited number of variables are used It is used selectively and therefore the evaluation of the effects of shocks on variables in the economy will not be comprehensive and complete. The second is that the selection of variables is based on the taste and choice of researchers. Recently, a lot of attention has been paid to models in which a wider set of economic information is used. This is possible by supplementing the traditional VAR models by using one or more factors.The purpose of this article was to evaluate macroeconomic shocks on banking stability in Iran's economy. In this regard, to estimate the latent variable of banking stability in the banking sector, three indicators of asset return, bank capital and asset return fluctuations have been used, and to analyze the effect of macroeconomic shocks on asset return, asset return fluctuations and bank capital, shock response functions have been used. Using the estimation model of the article, it has been used. According to the results, inflation and exchange rate shocks create a wave-like effect in the banking sector that lasts for about 5 years, and on the other hand, the impact of inflation on this sector is more stable than the impact of exchange rate shocks. The reason for this can be the conversion of the exchange rate shock into an inflation shock after a short period through the mechanism of economic activities in the banking sector, and it becomes effective through the increase in oil revenues and the budget deficit in this sector.The results of the graphs show that the impact of inflation and exchange rate shocks initially increases bank instability, but after about one to two years, the bank enters the instability stage. This situation manifests itself in the form of a decrease in the yield of assets, bank capital and yield fluctuations, which covers the period between 10 and 20 years after the shock. With this assessment, the period of banking instability is relatively longer than the period of banking stability. This issue is compatible with the usual observations of developments in the banking sector in Iran, because according to the usual observations, there is an increase in stability in the banking sector every one to two years, and after that the instability process begins relatively. ; Therefore, it can be suggested to the policymakers to apply policies to neutralize the shocks in the banking sector in case of inflation and exchange rate shocks of the central bank, so that the return on bank assets and capital does not face a decrease and instability.Since during the period under review, exchange rate fluctuations have had the greatest effect on the deviations and instability of short-term interest rates and inflation, it is recommended that monetary policy makers consider better management in the short term. For example, in a situation where the exchange rate increases a lot, the short-term interest rate can be changed in accordance with the efficiency of the real sectors of the economy, and in a way, the speculative demand for money is reduced. Also, by reducing the budget deficit (decreasing borrowing from the central bank) and managing oil revenues through budget amendments or the issuance of corporate bonds of the central bank, he acted to control liquidity and inflation.Due to the impact of macroeconomic variables on banking stability, banks should always monitor macroeconomic variables and consider appropriate policies for economic conditions. It is suggested that economic officials eliminate the atmosphere of uncertainty governing macroeconomic variables by establishing stability in monetary and financial policies.
Keywords
