Investigating the Effect of Macroeconomic Variables on the Contagious Risk of Financial Distress of the Banking System

Abstract

The 2008 U.S.A. financial crisis, which subsequently spread around the world, showed that financial distress in the banking network could spread to the network of all financial institutions and the entire economy of a country. For this reason, the development of accurate measurements of the risk of transmission of financial distress by each bank in the banking network is very important in controlling the risk of financial intermediation in every country. However, an issue that has not received much attention in previous research is the impact of macroeconomic factors on the risk of spreading financial distress. This is important because governments can anticipate the possibility of an economic crisis by anticipating an increased risk of spreading financial helplessness and adopting monetary and fiscal policies to reduce such risk. The present study, in three stages, estimates the risk of financial distress using the KMV method, estimates the risk of transmission of financial distress using the VAR method, and models the effects of macroeconomic variables such as inflation, exchange rate, and GDP on the risk of contagion. Based on the results, it is clear that GDP has a statistically significant inverse relationship with the risk of transmission of financial distress, meaning that with increasing GDP, the risk of transmission of financial distress is expected to decrease. Also, the relationship between the exchange rate and the risk of transmission is direct and significant, and an increase in the exchange rate leads to an increase in the interdependence of financial institutions and, consequently, an increase in the risk of transmission of financial distress.

Keywords

• financial helplessness
• helplessness contagion risk
• macroeconomic variables
• banking system
• risk contagion.