Analysis and Measurement of the Relationship Between Macroprudential Policy Tools and Banking Stability in Iraq for the Period (2015-2022)

Abstract

This study aims to analyze and measure the relationship between macroprudential policy tools and banking stability in Iraq, and to verify the significance of the relationship between the independent variables represented by the leverage ratio, the loan-to-deposit ratio, and the net open positions in foreign currency to capital, and the dependent variable, the banking stability index, over the period from 2015 to 2022. The study employs the Autoregressive Distributed Lag (ARDL) model for analysis.

 The findings indicate that there is a relationship between certain macroprudential policy tools and banking stability in the short run. Specifically, the relationship between the loan-to-deposit ratio and banking stability was found to be inverse, while the relationship between net open positions in foreign currency to capital and banking stability was positive. However, the relationship between the leverage ratio and banking stability was not statistically significant, In the long run, the study found an inverse relationship between both the leverage ratio and net open positions in foreign currency and banking stability, while the relationship between the loan-to-deposit ratio and banking stability was not significant.

Determining the nature of the relationship between macroprudential policy tools and the banking stability index is crucial, as it provides guidance to regulatory authorities on how to effectively use these tools to maintain banking stability, which, in turn, contributes to the overall stability of the financial system.