Impact of Asset Quality on Financial Distress in Banks

A healthy and profitable banking system can better resist against economic shocks, and play a more prominent role in financial system stability. Banks failure has disastrous effects on banking system and its effects spread on other banks and affects the whole economy. The main objective of this study is to investigate the impact of asset quality on financial distress in the country's banks. In this study, using financial ratios the effect of asset quality, payment facility and capital adequacy on financial distress indicators is examined.   For this purpose, data from 18 banks during the years 1388 to 1394 are collected from Tehran Stock Exchange. Using the software EViews, data are analyzed using panel regression models. It is shown that the ratios of impaired loans to total loans and net charge offs to total loans have positive and significant effect on financial distress. The ratios of loan loss reserves to total loans and net loans to total assets have negative and significant effect on financial distress. Moreover, capital adequacy ratio has positive and significant effect on financial distress.