Evaluating Resilience of Iran’ s Banking System and its Affecting Factors

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AMIRY MEYSAM; Mohagheghnia MohammadJavad; Balavandi Ali

Title

Evaluating Resilience of Iran’ s Banking System and its Affecting Factors

Author(s)

AMIRY MEYSAM | Mohagheghnia MohammadJavad | Balavandi Ali | Issue Writer Certificate

Keywords

Banking resilienceQ1

Economic resilienceQ1

VOLARE indexQ1

Abstract

Introduction Over the past few decades, the rise in the crisis in the financial and banking markets, along with increased depth and breadth of these crises, have made policy makers and financial monitors to pay more attention to this area. In this regard, given the important and significant role of banks in the markets of the country, it is essential to carry out studies to strengthen the resilience of the banking system, and to sustain the stability and economic growth. Therefore, in the present study, first resilience of the Iranian banks was investigated and evaluated, and then, the main determining and effective factors in resilience of the banks were investigated. Resilience is a relatively new concept in economics, and in recent years, especially after the financial crisis of 2008, it has seriously attracted researchers' attention. Among the first studies conducted in this field is the study by Briguglio, Cordina, Farrugia & Vella (2009), who investigated resilience in several countries, and concluded that economically successful, or crisis-resistant countries are inherently invulnerable, and do not experience crisis. They also concluded that the lack of economic strength in some countries might be due to the low resilience of their economies. In addition, results of this study suggest that there is a direct and indirect relationship between resilience of economy, with gross production per capita and economic fluctuations respectively. Other studies also investigated resilience of banking system, including the study by Blogna and Prasad (2009), who investigated resilience of Oman's banking system, and the performance of its banks from the international perspective focusing on changes in capital and liquidity risk. They analyzed the extent and magnitude of vulnerabilities that may occur within financial markets, and they investigated the effect of liquidity rules, as in Basel, on liquidity risk and resilience of banks. Results of their study demonstrated that Oman's banking system was less affected by the financial crisis of 2008 due to raising the capital of banks. In addition, the lack of extensive communication with the world's financial markets is another reason for the insignificant influence crisis on Oman's banking sector. On the other hand, the government's financial support and the central bank also helped the banking system in order not to face serious challenges. Vallascas and Keasey (2012) also investigated the resilience of 157 banks from 17 European countries. They concluded that in addition to the leverage and liquidity constraints in Basel III, there are other key variables including the bank size, non-interest income and asset growth that affect resilience of banks. In addition, they concluded that increasing both absolute size and system of the bank will increase their risk taking, and countries with smaller economies require smaller banks. Markman and Venzin (2014) also investigated resilience of a group of international European banks in 2002-2011. Results of their study suggested that relatively small banks (relative to domestic gross production), are more resilient compared to the relatively large ones. In addition, there was no significant relationship between the diversity of banking services and products with the resilience of the banking system. Methodology In this study, VOLARE index was used to calculate the resilience of banks. To calculate this index, first average return on equity (ROE) was calculated for each bank in different years, and this long-term average was in fact a measure of how well the bank operates and how profitable it is. Then, to calculate the volatility of ROE over the years, its adjusted standard deviation (ASD ROE) was used, which indicated the ability of banks to sustain profitability, and then, the adjusted return on equity (ASD ROE) was introduced. After calculating the difference in ROE of each bank for consecutive years, the sum of these differences was set to P for those years when the difference is positive and N for the years when the difference is negative. SD is the ROE's standard deviation for the years under study. It is expected that banks with higher ROEs have higher ASDs and vice versa. In addition, those banks that were able to have less fluctuations while sustaining the average stock market return, were more resilient, while those with lower average stock market return along with high fluctuations, were less resilient. In the next step, after calculating resilience of the banks, to investigate factors affecting resilience of the banks, the effect of the bank size, share of non-interest income, leverage and liquidity ratios on resilience of banks was investigated using a regression equation derived from studies conducted by Vallascas and Keasey (2012), Markman and Venzin (2014) Calmè s and Thé oret, (2014). Results and Discussion In the present study, resilience of the banks was investigated and measured using VOLARE index. Average VOLARE index for private banks, privatized government banks, and government banks was 0. 20, 0. 10 and 0. 07 respectively. Therefore, it is concluded that resilience of banks is affected by the bank's ownership structure and corporate governance. In the second section of the study, main factors affecting resilience of banks were investigated. Investigating main factors affecting resilience of banks indicated that there is a direct relationship between resilience of banks with equity ratio, share of non-shared revenues from total revenues, and the ratio of facilities to bank assets, and, there was an indirect relationship between the ratios of facilities to deposits with resilience of banks. In addition, the results indicated that the effect of bank size on the resilience of Iranian banks was not significant.

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APA: Copy

AMIRY, MEYSAM, Mohagheghnia, MohammadJavad, & Balavandi, Ali. (2019). Evaluating Resilience of Iran’ s Banking System and its Affecting Factors. JOURNAL OF MONETARY & FINANCIAL ECONOMICS, 25 (new)(16 ), 255-276. SID. https://sid.ir/paper/401397/en

Vancouver: Copy

AMIRY MEYSAM, Mohagheghnia MohammadJavad, Balavandi Ali. Evaluating Resilience of Iran’ s Banking System and its Affecting Factors. JOURNAL OF MONETARY & FINANCIAL ECONOMICS[Internet]. 2019;25 (new)(16 ):255-276. Available from: https://sid.ir/paper/401397/en

IEEE: Copy

MEYSAM AMIRY, MohammadJavad Mohagheghnia, and Ali Balavandi, “Evaluating Resilience of Iran’ s Banking System and its Affecting Factors,” JOURNAL OF MONETARY & FINANCIAL ECONOMICS, vol. 25 (new), no. 16 , pp. 255–276, 2019, [Online]. Available: https://sid.ir/paper/401397/en

Scientific Information Database

ISSN: 2588-4824

Journal Paper

Evaluating Resilience of Iran’ s Banking System and its Affecting Factors