The Impact of Macroeconomic Variables on Bank's Balance Sheet: An Stress Test Approach

This paper employs a dynamic system of simultaneous equations to carry out the impact of macroeconomic as well as bank-specific balance sheet variables on a set of Financial Soundness Indicators (FSIs) derived from the balance sheet of an Iranian private bank. Selected FSIs are the ratio of short-term to total liabilities, ratio of granted credit to total assets, and the share of highly liquid assets. In spite of the low market share of the chosen bank, we found that the macroeconomic status has a significant impact on the bank's balance sheet. In particular, controlling on bank-specific indicators, the value added of industry and services sector in the National Accounts and the indices of consumer and housing prices significantly explain FSIs of the mentioned bank. Using historical data on both macro variables and bank-specific indicators, we put the balance sheet of the bank under investigation under some disfavorable but likely macro scenarios and derive thresholds under which some FSIs, e.g. ratio of short-term to total liabilities, ratio of credit granted to total assets, and share of highly liquid assets reveal unhealthy states.