The Impact of Business Cycles on Banking System Soundness (With emphasis on Asset Quality)

A healthy and profitable banking system can better withstand economic shocks and play a more effective role in the sustainability and stability of the financial system. The creation of this type of banking system is possible when all financial institutions operating in a country's money market are sound institutions and have appropriate financial indicators. The experience gained from the recent financial crisis and the devastating effects of transition the crisis from the monetary sector to the real sector of the economy have shown that it is necessary to pay more attention to the issue of banking health. Therefore, the main purpose of this article was to investigate the factors affecting the asset quality ratio of the country's banking system, as one of the main indicators of banking system soundness with the emphasis on business cycles, macroeconomic variables and banking variables in the time period between the years 2001 to 2018. The statistical population in the study was 29 banks operating in Iran. In this research, the dynamic panel model, system Generalized Method of Moments (GMM) has been used to achieve the desired goals. The results show that business cycles have a significant negative correlation with the quality of assets in the banking system. Also, all macroeconomic and banking variables have a significant correlation with the ratio of asset quality in the banking system.