Institutional quality has been recognized as one of the key factors influencing the stability of the banking system in economic studies. This study examines the short-term and long-term effects of various institutional quality indicators and intra-bank factors on the stability of the Iranian banking system. To this end, panel data related to 18 banks listed the Tehran Stock Exchange from 2008 to 2022 were collected and analyzed using the Pooled Mean Group (PMG) approach with Stata and EViews software. The results indicate that the rule of law has a positive and significant relationship with banking stability in both the short and long term. Conversely, the corruption index and economic policy uncertainty exhibit a negative and significant relationship with the banking stability index in the long term. In addition, credit risk and liquidity risk negatively and significantly affect the stability of the banking sector in the long term, though their short-term effects are statistically insignificant. The inflation rate and bank size also have negative and significant long-term relationships with banking stability, while the economic growth rate has a positive and significant long-term effect. These findings highlight the importance of improving institutional quality and reducing economic risks to enhance the stability of Iran’s banking system 
 
Aim and Introduction
The confirmed causal relationship between economic growth and banking stability established in economic literature underscores the importance of examining the factors influencing the stability of the banking system. Due to its functional nature, the banking system is continually exposed to various risks that can alter its performance and stability.
Institutional quality is one of the key indicators identified by economic and banking scholars as influencing banking system stability in recent studies. The role of institutional variables in economic growth and their impact on banking stability has been emphasized extensively. Institutional deficiencies and the absence of an enabling environment for productive economic activities can lead to declines in production and profitability, reduced economic growth, and an increase in non-performing loans—ultimately diminishing banking stability.
According to financial economists, efficient and high-quality institutions play a crucial role in managing financial market risks. In the absence of an appropriate legal and regulatory framework, depositors’ lack of confidence in the banking system weakens the ability of financial markets to attract and retain capital. This can result in capital outflows and reduced domestic investment opportunities.
Accordingly, present study aims to examine the effects of various institutional quality indicators, along with intra-bank and macroeconomic variables, on the stability of the Iranian banking system.
 
Methodology
To achieve this aim, panel data for 18 banks listed on the Tehran Stock Exchange from 2008 to 2022 were collected and analyzed using the PMG approach. The analyses were conducted with Stata and EViews software.
 
Results and Discussion
The empirical findings reveal that the rule of law has a positive and significant relationship with banking stability in both the short and long term. In contrast, the corruption index and economic policy uncertainty have a negative and significant relationship with the banking stability index in the long term. These results suggest that improving institutional quality promotes financial innovation and reduces credit allocation costs, thereby enhancing the stability of the banking system, facilitating economic growth, and mitigating systemic risk.
Moreover, credit risk and liquidity risk have negative and significant effects on banking sector stability in the long run, but are insignificant in the short run. The significant long-term negative impacts of these risks can be attributed to the increase in opportunity costs arising from liquidity constraints and problematic receivables. Liquidity risk stemming from uncertainty about future withdrawals and the potential for unexpected deposit outflowscompels banks to maintain high-liquidity, low-yield assets, increasing opportunity costs and reducing overall stability. The negative long-term impact of credit risk can be explained by the accumulation of non-performing loans and blocked assets, which decrease profitability and, consequently, banking.
Furthermore, inflation rate and bank size exhibit negative and significant long term relationships with banking stability, while the economic growth rate exerts a positive and significant long-term effect.
 
Conclusion
The stability and sustainability of the banking system and the identification of factors influencing it have become central concerns among scholars and policymakers in recent years. A stable and efficiently functioning banking system is essential for achieving sustainable economic growth, whereas instability can produce adverse macroeconomic, social, and political consequences stemming from crises within the financial system.
The results of this study that institutional quality indicators have significant effects on banking stability. Specifically, low economic policy uncertainty is associated with strong institutional quality and low levels of corruption. Therefore, improving institutional quality indicators can enhance banking system stability by fostering economic growth and promoting macroeconomic prosperity.
Policymakers should prioritize controlling corruption, strengthening the rule of law, and minimizing economic uncertainty to safeguard depositors, borrowers, and investors. These findings underscore the importance of institutional reform and risk mitigation in promoting the stability of Iran’s banking system.