Economic Policy Uncertainty, Credit Risk, and Lending Decisions: Banks Listed on the Tehran Stock Exchange

Authors

https://doi.org/10.22105/tqfb.v2i1.47

Abstract

This research investigates the relationship between Economic Policy Uncertainty (EPU), credit risk, and lending decisions using the Generalized Method of Moments (GMMs) over the period from 2019 to 2023 for 12 banks listed on the Tehran Stock Exchange. The study employs three regression models to analyze the dynamics of Non-Performing Loans (NPLs), Loan-To-Deposit Ratios (LTDRs), and Return on Assets (ROAs) within the banking sector. Findings reveal a significant persistence in NPLs, indicating that banks with higher past NPLs face ongoing challenges that adversely affect their financial health. A notable negative relationship between Leverage (Lev) and Non-Performing Loan Ratio (NPLR) suggests that more leveraged banks may implement effective risk management strategies, reducing their exposure to NPLs. Additionally, capital adequacy emerges as a critical factor, with higher capital ratios correlating with lower NPLs. The analysis of LTDR indicates that Lev and capital adequacy significantly influence lending practices, while a marginally significant relationship between EPU and LTDR suggests external uncertainties may slightly impact lending decisions. Model results further demonstrate strong persistence in profitability, with historical ROA positively predicting current ROA. Overall, this study underscores the importance of effective risk management practices in banking and highlights ongoing challenges posed by NPLs, particularly for larger institutions. Recommendations include prioritizing capital buffers and monitoring lending practices to mitigate risks while fostering sustainable profitability growth. Future research should explore additional variables to elucidate the complexities of banking performance metrics.

Keywords:

Economic policy uncertainty, Credit risk, Lending decisions, Performance

References

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Published

2024-02-07

Issue

Vol. 2 No. 1 (2025): Transactions on Quantitative Finance and Beyond

Section

Articles

How to Cite

Fakhreddin Fakhrhosseini, S. F., & Naserhojjati Rudsari, R. (2024). Economic Policy Uncertainty, Credit Risk, and Lending Decisions: Banks Listed on the Tehran Stock Exchange. Transactions on Quantitative Finance and Beyond, 2(1), 14-22. https://doi.org/10.22105/tqfb.v2i1.47
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