Non‑Performing Loans and Bank Stability during Monetary Tightening Cycles: A Panel Study of Systemically Important Banks in Iraq during 2014-2024

Abstract

This study examines the dynamic relationship between non‑performing loans (NPLs) and bank stability across systemically important banks (SIBs) in Iraq over the period 2014–2024, a decade marked by pronounced monetary tightening cycles, oil price shocks, and post‑conflict reconstruction. Using an unbalanced annual panel dataset from seven SIBs (accounting for over 70% of private sector banking assets) and applying fixed effects and system GMM estimation, we find that a 1 percentage point increase in the NPL ratio reduces the Z‑score (a measure of bank stability) by approximately 0.38 units during tightening phases, an effect three times larger than during neutral or accommodative periods. Furthermore, the interaction between monetary policy rates and NPLs is positive and significant, indicating that higher policy rates amplify the destabilizing effect of bad loans. Bank‑specific factors—capital adequacy, return on assets, and deposit growth—moderate this relationship. The results suggest that Iraqi SIBs are asymmetrically vulnerable to interest rate shocks, with state‑owned and larger private banks exhibiting differential resilience. Policy implications include the need for countercyclical provisioning, enhanced supervision of connected lending, and a macroprudential framework tailored to dollarized, oil‑dependent economies.