Analyzing the Effects of Balance Sheet Approach (Firms-Banks) on Banks\' Non-performing Loans (in Persian)

Seyyed Mahmood Alavi and Soode Saberian Ranjbar
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Seyyed Mahmood Alavi: Iran
Soode Saberian Ranjbar: Iran

Journal of Monetary and Banking Research (فصلنامه پژوهش‌های پولی-بانکی), 2010, vol. 2, issue 3, 115-156

Abstract: According to review of recent developments in both fields of macroeconomic and banking in Iran¡ and their assuring effects on economy's recession cycle and rising banks' non-performing loans (NPLs)¡ the ground for the formation of hypothesis tried to examine in this paper is set: "Banks' NPLs are fostered by real sector developments through deterioration of the balance sheets of companies and non-financial firms following financial and real assets price bubble burst".In order to test the hypothesis¡ the theoretical literature relating to balance sheet approach (firms' and banks' balance sheets) has been reviewed. Our findings indicate that decline in the aggregate demand for loans and the formation of a recession cycle in recent years¡ especially after 1387¡ have raised firms' default risk. The phenomena happened following the assets market drop off¡ especially the real estate market fall in the banks' lending real rate and the inappropriate price setting of domestic and foreign services in favor of more imports. These have caused banks to directly suffer from credit risk and NPLs.The most important politic recommendation is financial capital injection to banks without the fiscal stimulus of government and encouragement of aggregate demand by utilization of proper fiscal policy. During recession¡ since expansionary monetary policies have less affects on demand encouragement¡ emphasis on discretionary monetary expansion only causes financial and economic instability¡ resulting in inflation in further economic cycles. Reconstruction of firms' and banks' financial structure could be a major medium-term mean requiring the restructuring of economy's financial structure.

Keywords: Asset Price Bubble; Aggregate Demand (AD); Economic Cycles; Balance Sheet Approach; Default Risk; Non; performing Loans; Fiscal Stimulus (search for similar items in EconPapers)
Date: 2010
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