The Effect of Financial Repression Policy on Bank Credit Risk Taking (Evidence from Iranian Banking Sector)

The problem of overdue receivables and non-performing loans, consequently, credit risk, has already been a major challenge in the Iranian banking system. Also, financial repression policy in most developing economies, such as Iran, is a common policy. The purpose of the present research is to outline the long-term effect of the central bank's monetary policy under conditions of financial repression on credit risk-taking in the Iranian banking sectors. This study was performed using ARDL in the period 2006-2007. The empirical results revealed that interest rate ceiling and restriction on legal reserve ratio policies have reduced the risk appetite of banks. Although misallocation of resources increased the credit risk, the periodic rises in exchange rates have been profitable for the companies, which are conducted under the banks' control due to revenue generation. Thus, the effect of risky lending has been somewhat offset in this way. Generally, it is concluded that the financial repression policy has reduced the credit risk in the Iranian banking sector.