Does cultural economics affect country’s competitiveness?

Abstract

Toxic assets and weak credit quality remain a central concern for banking stability, especially in emerging markets where mortgage lending is expanding and provisioning frameworks (e.g., IFRS 9 expected credit loss) are meant to absorb downside risk. However, evidence is limited on whether provisioning coverage reduces mortgage distress directly or mainly operates by moderating the impact of toxic asset exposure—particularly in the Iraqi banking sector. This study addresses this gap by testing both average effects and distributional/interaction mechanisms linking toxic assets and provisioning to mortgage portfolio performance. Using audited annual data from seven Iraqi commercial banks observed from 2017 to 2025 (63 bank-year observations), we examine Toxic Assets Ratio (TAR) and Provision Coverage Ratio (PCR) in relation to non-performing loans (NPL), mortgages-to-total loans (MTL), and return on mortgage assets (ROMA). We estimate two-way fixed effects panel models (bank and year effects), quantile regression robustness for NPL, an interaction model (TAR×PCR), and a dynamic robustness specification. Results show that higher TAR is robustly associated with higher mortgage distress, while the protective role of provisioning emerges most clearly through moderation: higher PCR significantly attenuates the marginal effect of TAR on NPL. Dynamic estimates indicate persistence in distress over time. These findings imply that controlling toxic asset accumulation is essential for improving mortgage portfolio outcomes and that provisioning coverage primarily functions as a buffer that reduces banks’ sensitivity to toxic exposure. Future research can extend these tests using broader samples and fully specified system-GMM designs.

Keyword : Toxic assets, mortgage portfolio, non-performing loans, provisioning coverage, IFRS 9, Iraqi banks