| Abstract: |
This paper investigates the transmission of oil price shocks to the banking
sector in oil-dependent economies, using Oman as a case study. We develop a
DSGE model featuring an integrated banking block with endogenous credit
rationing and a sovereign wealth fund stabilization rule, calibrated to Omani
institutional targets and disciplined by Bayesian methods. Our structural
approach disentangles two primary transmission channels: the solvency channel,
driven by credit risk and non-performing loans (NPLs), and the liquidity
channel, driven by pro-cyclical government deposit withdrawals and sovereign
debt issuance. The structural variance decomposition attributes over 54% of
non-oil GDP variance and 53% of credit variance to oil price shocks, while
bank capital shocks account for less than 0.1%, confirming the quantitative
dominance of the liquidity channel. We identify a precautionary liquidity
motive—a “liquidity buffer trap”—where banks maintain excess liquidity during
booms to hedge against hydrocarbon volatility, structurally suppressing credit
to the productive sector. Our counterfactual regime analysis reveals the
stabilizing power of credit depth: banking conservatism protects long-term
physical capital formation, and the ongoing financialization of the corporate
sector— including the rapid growth of Islamic banking and sukuk markets—under
Vision 2040 further amplifies this structural resilience. We acknowledge
identification challenges inherent in small-sample structural estimation and
discuss the sensitivity of results to key modeling assumptions. |