The Impact of Interest Rate Defense on the Financial Stability of Banking in Iran

Interest rate defense is defined as a defense policy in the face of currency shocks and in order to prevent the outflow of deposits from the banking system, and to prevent financial instability and banking crisis. With the expansion of economic sanctions in the late 2010s, the exchange rate rose sharply, and as a result, the monetary authority increased bank interest rates to prevent the phenomenon of bank run. In this study, the effect of interest rate protection on the financial stability of private and public banks and the total banking system is analyzed. Variables affecting financial stability are divided into two groups of internal and external banks variables. The model is estimated based on the three-stage least squares method based on data from 2001-2019. The results of the study show that although the increase in banks rates in the occurrence of currency shocks has positively affected the financial stability of all banks and private banks but had no effect on state-owned banks. However, this policy is one of the reasons for the increase in non-current receivables in the banking system due to the effect of currency shocks on external bank variables such as inflation and increasing financing costs in economy.