The effect of foreign exchange rate and inflation volatilities on nonperforming loans of banking sector with regard to sanction situation by using markov switching garch model

Subject Areas :

Ahmad Eini ¹ , Beitollah Akbari Moqadam ² , Roozbeh Balounejad Nouri ³

1 - Department of economics, Faculty of Management and economics , Islamic Azad University, Qazvin ,Iran
2 - Department of economics, Faculty of Management and Economics, Islamic Azad University, Qazvin, Iran
3 - Department of economics, Faculty of Management and Economics, Islamic Azad University, Qazvin, Iran

Received: 2025-10-19 Accepted : 2025-11-22 Published : 2025-12-17

Keywords: Nonperforming Loan, Exchange rate Fluctuations, Inflation Fluctuations, Sanction, Markov Switching,

Abstract :

Non-performing loans are one of the biggest challenges that the banking system had to face in recent years. Its result is a decline in banks facilities, while banks' facilities play a major role in financing economic activity in Iran. Among the economic factors affecting non-performing loans, the role of inflationary and the exchange rate fluctuations, as well as the recent sanctions, are important. In addition, the impact of these factors depending on the economic conditions will not be constant. In this regard, this study examined the impact of sanctions, exchange rate and inflation fluctuations on the volume of banks' non-performing loans using the Markov Switching approach over the period 1983-2017. Based on the experimental results, the non-performing loans have three different behavioral regimes (zero, one and two). Foreign sanctions, exchange rate fluctuations and inflationary fluctuations in all three regimes increase non-performing loans, and these variables have a far greater effect than those of the low and medium regimes. Also, based on the results, the capacity of government fiscal policies and the optimal allocation of facilities can help reduce the non-performing loans. the results showed that increasing the liquidity ratio in the high non-performing loan regime significantly increases the non- performing loan. According to the probabilities, non- performing loans are more likely to reach equilibrium in the low regime. The average duration of this regime is 13 years on average.

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