Prediction of Banking Distress and Contagion of Crisis in the Banking Network (With Application of Linear and Non-Linear Hybrid Approach

The present research aimed at prediction of banking disorder and contagion of crisis in the banking network is conducted by application of linear and non-linear hybrid approach. The present research method is of descriptive-survey, and practical in terms of objective. Therefore, in order to attain this objective, firstly, banking system fragility index (BSFI) is reviewed as an early warning system in order to identify banking crisis, in four banking system sectors (specialized, commercial, private and credit institutions), and banking system fragility index is reviewed in the stated four sectors by applying linear and non-linear approaches by making use of data obtained during March 2016 until December 2020. Results of calculation of banking system fragility index in sub-sectors of the banking system indicate periods of high fragility of the banking system, in particular in January, February and March 2017, which might be due to effects of election. Furthermore, in December 2020, high risk-taking was observed in the banking system, arising from creation of a bubble, which represents a strong warning for future problems of the national banking system. Furthermore, during the review period, banking network is noticeably fragile. Notably, results of Granger linear causality test indicate two-sided causality between credit institutions and private banks, a one-sided causal relationship from private banks to specialized and commercial banks and also a one-sided causal relationship from specialized banks to commercial banks. Notwithstanding, results of non-linear causality test reveal contagion of financial fragility from commercial banks to other sectors of the banking network. Of note, since commercial banks remain as subsector of public banks, there is a one-sided causal relationship between the former with other sectors of banking network and regarding state-owned nature of these banks, managerial policies of these banks, not only create financial fragility of commercial banks, but also transfer such fragility to other sectors of the banking system. It is worth mentioning, private banks and non-bank credit institutions, considering network relationship mechanism, transfer financial fragility status to other sectors of the banking system.