Business Cycles Effects on Default Rate of Banking Facilities during 2000-2009 in Iran and Defining Optimal Facility Portfolio for Banking System

One of the most important problems of the banks is that how they can control and decrease credit risk. In other words, banks would want to know that what determinants effect of credit risk, which one can be controlled and in general, how they can reduce the credit risk of their portfolio.To answer these questions, we use a macroeconomic model in this study to analyze the credit risk in all economic sectors of Iran, namely, agricultural, industry and mining, services and housing sectors. This model is based on CPV model of Wilson which can explain the relationship between default rate in different sectors and economic states of each sector. The model of the study is estimated using seemingly unrelated regression model and then the effects of each variable of the model on default rate. The optimal portfolio of banking system facilities is also determined using least value at risk of default rate of banking system facilities. We found that the coefficients of the output of sectors, exchange rate of spot market, interest rate on facilities and oil price are positive and significant. The coefficients of producer price index and stock price are negative. The estimation result for each sector shows that macroeconomic variables have different effects on default rate of sectors. Using the Monte Carlo simulation, the best combination of portfolio which minimizes the value at risk of the first quarter of 2010 is a combination which includes 49% facilities in agriculture, 13% in industry and mining, 11% in services and 27% in housing. If the facilities are allocated in this way, the value at risk of the next period (first quarter of 2010) would be equal to 25%.