Background and Objective: This research was conducted to measure tail risks and interbank correlations within the Iranian banking system and to identify the root causes of systemic fragility. The focus is on the extended period following the global financial crisis (from 2008 to 2024), during which the banking system has been under severe pressure from structural factors such as fixed provisional profit payments to depositors, widespread overdrafts from the central bank, severe balance sheet imbalances, and macroeconomic shocks. The primary objective is to assess the current state of systemic vulnerability and forecast probable future paths using advanced hybrid modeling approaches.
Methodology: This study employs a novel hybrid model integrating deep learning, Gaussian processes, Time-Varying Parameter Vector Autoregression (TVP-VAR) models, interbank network analysis, and extensive Monte Carlo simulations. Quarterly data on twelve key banking variables (including overdrafts, non-performing loans, capital adequacy ratio, liquidity, etc.) alongside macroeconomic variables (inflation, exchange rate, economic growth, etc.) from 2008 to 2024 were analyzed. A systemic vulnerability index and the magnitude of risk transmission through various channels (particularly the trust channel) were calculated and compared with conventional methods.
Results and Findings: The results indicate that the Iranian banking system entered a stable critical and chaotic regime at the beginning of 2008 and has remained in this state until the end of 2024. The systemic vulnerability index surpassed 0.96 in 2024, signifying a highly fragile condition nearing a critical point. Shocks to the system operate in a highly asymmetric manner, with negative shocks being approximately ten times stronger than positive ones and tending to be nearly permanent. Risk transmission among banks occurs almost entirely (close to 100%) through the trust channel and hidden correlations. The root cause of this fragility is the continued policy of paying fixed provisional profits to depositors (despite real resource-use imbalances) and the widespread overdrafting of banks from the central bank, which has created a vicious cycle of liquidity expansion and steadily increasing systemic risk. Simulations estimate the probability of a systemic collapse by the end of 2026, assuming the current trend continues, at over 87%. Conversely, immediate and decisive structural reforms, including the complete elimination of fixed provisional profit payments, the dissolution or merger of insolvent banks, and a serious overhaul of corporate governance, could steer the banking system toward a stable and self-reinforcing regime. The forecasting accuracy of the proposed model is significantly higher than that of traditional methods.