The Effects of Microeconomic and Macroeconomic Variables on Iran's Banking System Fragility Using Markov-switching Model

Document Type : Research Article


1 Associate Professor, Department of Economic Development and Planning, University of Tabriz

2 Associate Professor, Department of Economic Sciences, University of Tabriz


The main purpose of this study is to investigate the effects of variables of microeconomics and macroeconomics on the banking system fragility of Iran, using Markov-switching model. For that purpose, first, the Iran's banking system fragility index is developed over the priod of 2002:2–2015:1. Based on the results, three major periods of high risk-taking, two periods of high fragility, and stability in the rest of the periods are observed. Accordingly, in the next step, three-regime Markov-switching model is used to investigate the effects of variables of microeconomics and macroeconomics on mentioned banking system fragility index. Findings based on Markov-switching regression analysis confirm the importance of both variables of microeconomics and macroeconomics in determining the Iran's banking system fragility. Findings indicate that microeconomic variables such as low capital adequacy, Low asset quality and low liquidity of banks along with macroeconomics factors such as decreasing real GDP growth, high inflation and increasing government budget deficit will lead to more fragility in the Iranian banking system.


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