Assessing the Impact of Unrealized Bank Profitability on Central Bank Monetary Policy in Iran

Articles in Press

Document Type : Original Article

Authors
Nima Shahbazi 1
Abdolah Pakdel Moghanlu 2
Mohammad Javad Sheikh 3
Abbas Ali Daryaei 4
1 Department of Financial Management, Science and Research Branch, Islamic Azad University, Tehran, Iran
2 Department of Accounting, Ardabil Branch, Islamic Azad University, Ardabil, Iran
3 Department of Accounting, Kharazmi University, Tehran, Iran
4 Department of Accounting, Imam Khomeini International University, Qazvin, Iran
10.22034/jik.2025.78768.4815
Abstract
Banks, as financial intermediaries, play a crucial role in monetary stability and the efficiency of the financial system; however, unrealized accounting practices can have significant effects on monetary policy. This study aims to examine the impact of unrealized bank profitability on the reliance of banks on central bank policy instruments in Iran. The statistical population includes 21 banks and financial institutions listed on the Tehran Stock Exchange, covering the period 2011–2023. A mixed-methods approach was employed; the quantitative part utilized a dynamic panel model with a generalized method of moments, while the qualitative part estimated the actual extent of earnings management in non-performing loans based on expert opinions using a semi-structured questionnaire. In the first scenario, based on officially reported data, results indicated that unrealized profitability had a positive and significant effect (coefficient = 0.187, 99% confidence level) on banks’ reliance on monetary policy instruments. In the second scenario, incorporating adjustments based on expert assessments, the estimated share of hidden non-performing loans was approximately 23.4%, and after recalculating the unrealized profitability index, its coefficient increased to 0.254, reflecting a stronger impact. Other variables behaved similarly to the first scenario. Comparing the two scenarios demonstrates that accounting manipulations amplify the role of unrealized profitability in increasing banks’ dependency on central bank resources, potentially prompting greater policy intervention. Overall, the findings highlight the importance of transparency in bank financial reporting and the need for policymakers to consider the effects of unrealized earnings on monetary policy design.
Keywords
Unrealized bank profitability
non-performing loans
earnings management
monetary policy
central bank

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