Macro Stress Test in Iran Banking System with Emphasis on Credit Risk

In this paper, we present the model macro-stress test Risk Credit for the banking system of Iran during the period 2004-2019. The goal is to evaluate the vulnerability of the banking system through the credit risk to the country's economic shocks. In this regard, an extended model of credit risk used by Thomas Wilson has been used for credit facilities in Iran, including credit banking facilities. The results of the applied analysis show that the exchange rate has a strong effect on credit risk. In addition, the variables of the inflation rate, economic growth, loan growth, and liquidity rate have a less negative effect and the unemployment rate has a positive effect on credit quality. Using Monte Carlo simulation and calculating the risk value and expected losses for each of the economic variables, the capital required by banks to cover losses is obtained. The results of the credit risk stress test show that an adverse scenario due to currency shock with a standard deviation has the greatest impact on the amount of capital required to cover unexpected losses compared to the baseline scenario and banks need less capital to cover their losses. But to cover the losses caused by the shocks of other variables, it is necessary to increase their capital. In general, according to the obtained results, it is necessary for Iranian banks to increase their capital in order to cover their unexpected losses according to the instructions of the Ball Committee and to use the stress test as a risk management tool.