The Analysis for Impacts of Credit Risk and Liquidity Risk on the Insolvency Risk of Banks in Iran

The insolvency of financial sector, particularly the banking system may bear de facto the devastating impacts on the economy as well as the public confidence. However, with foundat on of private banks and augmentation of privatization procedures for state-owned banks in Iran, the insolvency risk has become de jure, a cardinal issue for banking industry in toto. In this context, two main risks among others, which banks and credit institutions may encounter in the process of their operations, are per se denoted as credit risk and liquidity risk, Ipso facto. In this paper, an attempt is made to investigate the impacts of credit risk and liquidity risk on the insolvency risk of Iranian banks. For this purpose, we have chosen 18 state and private-owned Iranian banks as the statistical sample for the study period of (2005-2015), using descriptive-analytical research methodology pro rata. To test the hypothesis, we have applied the Generalized Least Squares Estimator (GLSE) model and panel data method. The results prima facie indicate that, increasing the credit risk comprising as diminishing the quality of facilities and rising the volume of extended loans may exert positive and negative but both significant impacts on the insolvency risk respectively, while the liquidity risk constitute a positive and significant effect on the insolvency risk of banks under the study, Sine qua non.