Investigating the Effects of Oil Price Changes on Fragility of Banks in Iran, with an Emphasis on linkages between Macroeconomic and Banking Sector

In this paper, the linkages between oil price changes, macroeconomic fluctuations and fragility of banks in Iran have been examined by taking account of some macroeconomic variables as well as bank-level variables of 11 Iranian banks from 1384 to 1396. For the empirical investigation, dynamic panel data models have been used. The models have been estimated by Generalized Method of Moments and Panel Vector Autoregressive. The results suggest that a low growth of oil price has been led to a decreasing growth rate of loans, which cause a relatively slower growth rate of non-performing loans ratio (NPL). However, in most oil-exporting countries, the reduction of oil price growth lead to an increase in NPL. On the other hand, non-oil GDP growth and stock index growth have negative relationship with NPL. There is also a negative feedback relationship between NPL and non-oil GDP growth. An unfavorable oil price and non-oil GDP growth shocks would lead to an increases in NPL. As a result, the negative effect of non-oil GDP growth, due to the increases in NPL (Fragility of Banks) , has a negative effect on the real sector of economy.