Empirical and Theoretical Evidence of Moral Hazard in the Iranian Banking System

Abstract

Since moral hazard in behaviors of banking system may jeopardize efficiency of debt mechanisms to fund rising, it is important to examine the empirical and theoretical evidences of moral hazard in the Iranian banking system. Risky behavior of banking system is caused by the asymmetric information problems between creditors and central bank. This paper considers the simultaneous effects between changing risk and leverage that justifies existence of moral hazard in the Iranian banking system. To do so, we use dynamic panel data model for the period 2006-2019 in Iranian banking system. According to the obtained results, there is a significant positive relationship between the level of risk and leverage. This relationship implies the existence of moral hazard that can be caused unsuccessfully performance of central bank in supervision and supporting in the banking system.

Keywords

• banking
• moral hazard
• banking risk
• leverage
• simultaneous equations