Analyzing the Impact of Banking Imbalance on Economic Welfare in Iran

Given the economy’s dependence on banks as the primary source of corporate financing, the performance of the banking system significantly affects the broader economy. Banking system performance is typically assessed through its balance sheet. This study examines the reality that when this crucial financial statement becomes imbalanced, how economic welfare is affected. Considering the importance of this issue, the present study employs the Autoregressive Distributed Lag (ARDL) approach to estimate the impact of banking imbalance on economic welfare over the period 1978–2022 in two frameworks. In the first framework, bank debt growth to the central bank is used as an indicator of banking imbalance, while in the second framework, government debt growth to the central bank is employed to strengthen the robustness of the results. The composite economic welfare index is used to measure economic welfare. The movement of the economic welfare index indicates that during the study period, it fluctuated around an average of 40.26. Similarly, the growth of bank debt to the central bank and government debt to the central bank showed fluctuations, with averages of 1.29 and -3.56, respectively. Long-term estimation results indicate that banking imbalance (based on both indicators) has a negative effect on economic welfare. Additionally, per capita income and economic growth have positive effects, while inflation has a negative impact on economic welfare. Based on the results, ensuring the stability and soundness of bank balance sheets is crucial for maintaining economic stability, promoting sustainable growth, and ultimately enhancing economic welfare. Therefore, it is recommended that measures to reduce banking imbalance be implemented, such as reforming the banking system, converting non-productive bank assets into securities, preventing the transformation of banks’ overdrafts into credit lines, reducing mandatory lending, and ensuring adequate bank capital.