The Impact of Money Supply on the Nonperforming Loans (Case of Iran) Mohammad Valipour Pasha Hossein Bastanzad

Transcription

1 The Impact of Money Supply on the Nonperforming Loans (Case of Iran) Mohammad Valipour Pasha Hossein Bastanzad Spring

2 I. Literature review on the impact of key macroeconomic indicators and specifically broad money on the NPLs. II. Preview Recognition of empirical facts regarding the impact of selective macroeconomic indicators and specifically monetary aggregates on the Iranian banks consolidated NPLs. III. Delineation of the research hypothesis. IV. Illustration of econometrics methodology, model specification and data set V. The exploration of empirical estimations results. VI. Concluding remarks and policy recommendations. 1

3 Literature Overview Banks credit risk is usually measured by the NPLs ratio in the macroeconomic level which is mainly-evidently influenced by the output growth, money supply growth, and relative lending interest rates against inflation and assets market returns, assets market cycles as well as default of main borrowers. NPLs is generally originated from macro economic stance or institutional defaults which respectively-differently influence banks financing trajectories via capital and money markets. NPLs is technically considered as a stock variable which is smoothly-gradually changed. Caouette et al. (2000) Keeton and Morris (1987) Sinkey and Greenwalt (1991) Virolainen (2004) (Sorge, 2004) Altman and Sabato (2005) Louzin, Vouldis and Metaxas (2010) (Nkusu 2011) Shajari, Parastoo and Shajari, Houshang (2012) Saad and Kamran (2012) 2

4 Monetary aggregate transmission mechanism on the Iranian banks NPLs NPLs persistently rises in the Iranian banking network due to pro-cyclical monetary policy, lending rate ceiling, and negative real lending interest rate (financial repression). Although the central bank has occasionally proceeded to take more disciplinary measures over monetary policy via issuing debt securities and targeting on monetary aggregates, the banks NPLs have constantly exacerbated by the assigned facilities, negative real lending interest rate, and the other noticed contributors. 3

5 Return of money and stock markets Period Stock Market Return Nominal Interest Rate Inflation (Stock Market Return/ Nominal Interest Rate)*100 Real Interest Rate

6 Monetary aggregate transmission mechanism on the Iranian banks NPLs Fiscal dominance (Public entities) is also considered as the other driving force to induce the NPLs and shrink potential lending capacity while reinforcing central bank to finance banks liquidity shortage and give up the inflation or aggregate money targets. Broad money growth influences Banks soundness condition through lending, investment, profitability as well as NPLs channels. An increase in broad money raises banks deposits, so banks lending and investment resources grow proportionally as well. In this context, the share of investment in total assets also increases faster than the share of loans to total assets given the inflationary effect of broad money expansion. 5

7 Inf NPLs Statistical Fact Inflation and NPLs Ratio inf NPLs 6

8 Monetary aggregate transmission mechanism on the Iranian banks NPLs Higher inflation usually causes negative-real interest rate and shrink sustainable economic growth while simultaneously moving the financial resources from real to assets market. Borrowers are evidently demotivated to reimburse the loans given the outlook of higher capital gain at the assets markets and negative real interest rate. Notwithstanding, the spark in asset market price induces higher capital gain, the surge in the NPLs shrinks the banks profit. Thus Banks profit/loss statements are evidently faced with ambiguous conditions. Ultimately, an acceleration in the broad money growth is expected to build the NPLs up via a reduction in the real interest rate unless the economy is recognized at the stagnation condition. 7

9 Research hypotheses The key question is Does a rise in the broad money growth lead to an increase in the banks NPLs? Do the other macro-indicators including output growth, loan to deposits, loan to total loans, and real interest rate affect the NPLs? 8

10 Econometrics methodology & model specification Variable NPLs M2 R LTD LTL GDP NPLs 1 M R LTD LTL GDP

11 Econometrics methodology & model specification quantile 0.25 quantile 0.5 quantile 0.75 NPLs Coefficient p>iti Coefficient p>iti Coefficient p>iti M R LTD LTL GDP _cons Number of obs R-Sq Pooling Estimation NPLs Coefficient p>iti M R LTD LTL GDP _cons Number of obs. 114 R-Sq

12 The exploration of empirical results The impact of macroeconomic indicators on the NPLs of 19 matured banks is econometrically examined by the Pooling Data approach. The macroeconomic explanatory indicators are respectively included real broad money, real interest rate, loans to total deposits ratio, individual banks loans to total loans ratio as well as real GDP. A Quantile and Pooled Regressions are applied to examine the impact of macro and monetary indicators on the NPLs as credit risk measure (balanced panel data). 11

13 The exploration of empirical results Statistically, the impact of real broad money on the banks NPLs as the macroeconomic credit risk indicator in 25%, 50%, and 75% of sample are positive, significant and robust. The estimated coefficients of the other variables (including the ratio of individual banks loans to total deposits, banks loans to total loans ratio, as well as constant GDP) would underscore the positive-significant effect on the NPLs. Expectedly, the real interest rate has negatively-significantly influenced NPLs. Although expansionary monetary policy evidently reduces NPLs in developed economies, this study outlines that expansionary monetary policy increases NPLs in the Iranian banks through deteriorating impact of inflation on the real interest rate reduction and the assets market return escalation. 12

14 Thank you 13