Purpose: Pricing The structure of Iranian financial systems is based on banking loans and credits. For this reason, Iranian commercial banks maintain the monopoly over supplying credits to various sectors. Furthermore, together, they establish the biggest financial system in the economy. Due to the recent widespread banking crises in many countries, including Iran, and their impacts on their economies, studying banks' balance sheet problems at the time of these crises is crucial. Within the framework of a dynamic stochastic general equilibrium (DSGE) model, this research explains the crisis in Iran’s banking system and its effects on macroeconomic variables. Specifically, this is done by estimating the limits of fictitious assets of the banking system and calculating the balance sheets insolvency. Banking crises are usually characterized by two characteristics, a) major issues in the banking system, like depositors’ rush to withdraw money from banks and severe losses of the banking network, and b) ensued bankruptcies. The government has interventions in the face of losses of the banking network. The first case, which is termed as bank run and liquidity crisis, is caused by depositors’ rush to withdraw from the bank or any other situations in which the bank is unable to honor its obligation to its depositors. The second case is balance sheet crisis. This is an asset-liability gap in which the difference between a bank’s debt value and assets value exceeds the bank’s capital value. This research explores the latter issue. Methodology: The purpose of this study is to design an applicable model in macroeconomics so as to investigate the effects of balance sheet crisis on the main macroeconomic variables for Iran’s economy. A DSGE model is used for this purpose. The main structure of the model has been designed using the works of Deeb (2008 & 2010), Agnour et al. (2012), Kandak (2012) and Ahmadian (2014). The most important difference is the expansion of the banking model for the specific conditions of the Iranian banking system and the inclusion of balance sheet crisis as an imperative fact in the structure of that banking system. The model covers six sectors including household, firm, government, bank, oil revenue, and monetary authority. As mentioned, its distinctive feature is the application of a balance sheet shock through its most important component, namely the default of bank loans and its effect on macroeconomic variables such as production, investment and inflation. The shock of non-performing loans is modeled as a white noise shock. The white noise shock is also consistent with the behavior of delinquencies in the country's banking system. Given that the frequency of default events is very low compared to the number of loans and that defaulters have very different characteristics and considering that each loan default event occurs in different macroeconomic conditions, the default events should inevitably be considered as independent shocks. Results and discussion: The effect of the balance sheet shock on the deposit market is the same as its effect on liquidity, first decreasing and then increasing. Given that this model also takes bank rush into account, the occurrence of imbalances causes public panic and reduces the amount of deposits. From a microeconomic point of view, the depositor's fear reduces the household's desire to keep money. This drop in the deposit supply causes a sudden increase in the interest rate on deposits and, in turn, increases the bank's financial cost. Thus, banks' resources are under pressure due to the balance sheet shocks from two perspectives, namely a) a decline in cash inflows from the repayment of installments and b) an increase in interest rates on household deposits. The corresponding effect of an increase on the cost of capital for the firm is the reduction of return on investment. The financial theory of the firm suggests that financing through borrowing, due to its leveraged nature, increases the return on investment. In contrast, the use of internal financing and the firm's own capital reduces the return on investment. The decline in the offered credits, due to the balance sheet shock, forces healthy firms to replace bank financing with internal financing. Firms that are in default also de-leverage their balance sheets to repay their loans and prevent bankruptcy. These two effects, as discussed in the studies of Cristiano et al. (2007), Sons and Exo (2013) and Barzina and Makarkaski (2011), simultaneously reduce the level of capital and return on investment. Conclusions and policy implications: The occurrence of a balance sheet crisis disrupts the cash flow of the bank. As a result, it becomes difficult to provide resources for loans. In response, the bank compensates for its resource deficit by increasing interest paid on household deposits, which creates money and increases the money supply. Given that money supply belongs to households, a surge occurs in the impulse reaction function of household liquidity. This is a closed model of economy, which means household consumption and investment as well as firm and government expenditures constitute the demand of the whole economy. As such, the first effect of an increase in household’s liquidity is an increase in the total demand of the economy and inflation. As the impulse reaction functions suggest, consumption is greatly increased, which corresponds to an increase in inflation. The total effects of balance sheet shock on the macroeconomic variables of the country in this model have two important results. The first is a sharp drop in economic growth due to a balance sheet crisis. The second result is the rise in economic fluctuations and subsequently higher uncertainty.