Identifying Banking Crisis Using Banking Stress Index in Iranian Economy (Dynamic Factor Model)

By the fact that most of the public and private sector financing comes from the country's banking sector, It is important to maintain stability and prevent a crisis in the banking system. The purpose of this study is to identify the banking crisis using the Banking Stress Index in the Iranian economy for the period of 1398-1388. The Banking Stress Index is the best benchmark for assessing the banking crisis that reflects uncertainty, instability and financial friction in the banking system. In this study, the design of a bank stress index was performed using a dynamic factor model. This model is estimated by the maximum likelihood method and the stochastic pattern of missing data. Using six variables determining the banking crisis in the country, two banking stress indices with two different natures have been estimated in time series to examine the stability of the banking system. Finally, both indices of stress showed estimation; there is a precise timing of the coincidence between the greatest amounts of bank stress and the shocks to the Iranian economy. It was also concluded that bank stress indicators reflect the effects of external factors, including sanctions on the banking system fundamental weaknesses of the banking system, as well as being able to predict banking crises