Repercussions of global oil price shocks on banking soundness indicators in Iraq amidst parallel exchange rate fluctuations

Abstract

The main objective of the study is to estimate impulse response functions and test two basic hypotheses. The first is to show the response of both exchange rates and banking soundness indicators in Iraq to oil price shocks. The second is to estimate the response of banking soundness indicators to oil price shocks, for the period between 2016-2024 through monthly data. The study used the (VAR) methodology to estimate impulse response functions, and it concluded that oil price shocks have a decisive and significant impact on the exchange rate and banking soundness indicators. Also, the parallel exchange rate fluctuates greatly, which makes its shocks significantly affect the soundness indicators of the Iraqi banking sector, oil price shocks reduce non-performing loans and increase liquidity levels in Iraqi banks in the short term. However, non-performing loans tend to increase proportionally in the long term. Bank profitability is also proportionally affected in the medium term by rising oil prices. Capital adequacy levels decrease in the event of a positive oil shock. Regarding exchange rates, oil shocks to the local currency led to significant fluctuations in its value, both upward and downward.