International Conference on Economics, Finance & Business, London

UNCERTAINTY AND CAPITAL ADEQUACY: DOES IT MATTER FOR BANK HETEROGENEITY?

HOSSEIN TAVAKOLIAN, HAMED GHIAIE

Abstract:

This paper investigates the implications of sanctions and economic uncertainty on the capital adequacy and financial stability of Iranian banks. Utilizing a dynamic stochastic general equilibrium (DSGE) model, we analyze the differentiated impacts on banks with varying capital adequacy ratios, classifying them as either "good" or "bad" banks. Our findings reveal that economic uncertainty induces a form of moral hazard, leading to a fund outflow from good banks to bad banks, which in turn drives the decreasing trend of the aggregate Capital Requirement Ratio (CRR). The model illustrates that this dynamic undermines financial stability, exacerbating the systemic risks within the banking sector. The study underscores the critical need for robust regulatory frameworks to mitigate these risks and enhance the resilience of the banking system in the face of external economic shocks. Policy recommendations include implementing countercyclical capital buffers and adopting stringent capital requirements to safeguard against future economic disruptions.

Keywords: Capital adequacy, economic uncertainty, financial stability, heterogeneity.