The Effect of Exchange Rate Volatility on Non-performing Loans in the Banking System of Iran

The aim of the study is to investigate the exchange rate volatility on the non-performing loans (NPL) from 2005 to 2013 in 18 selected banks. In the first step, effective variables on NPL have been categorized in two groups namely macroeconomic and specific variables. Based on various tests of specific banking and macroeconomic variables separately, the evidence gives assurance of research variables’ durability. The assessment of Econometric Model in Panel Data with fixed effect shows that economic growth variables have negative effect, however the real interest rate gap variables of formal/informal market and exchange rate volatility have positive effect on the dependent variable eventually. The investigation of the specific banking variables has also indicated that both deposits to expenditure, representing the bank efficiency, and burden coverage, showing the bank size, have negative and significant effect on (NPL). The coefficient for capital adequacy ratio is not significant, though.
Meanwhile, the exchange rate volatility variable is being extracted by Exponential GARCH (EGARCH) Model.