Analyzing the Impact of Interest Rates on Components of Financial Accounting Reports: Evidence from the Iraqi Banking Sector

Abstract

This paper examines the transmission of interest rate fluctuations through the financial reporting mechanisms of banking institutions in fragmented emerging markets. There is a general view that interest rate adjustments uniformly influence bank performance through standard monetary transmission channels. But might these effects operate asymmetrically across the balance sheet, enhancing reported profitability while simultaneously constraining asset accumulation? If lending rate elevations suppress credit expansion even as elevated deposit rates strengthen revenue streams, conventional policy prescriptions may face inherent contradictions that complicate regulatory objectives and financial stability mandates. The paper shows by empirical analysis that lending interest rates exert a constraining influence on aggregate asset and liability positions, whereas deposit rates demonstrate a robust positive association with revenue performance and bottom-line profitability. Nevertheless, our findings confirm that interest rate policies remain fundamental in architecting financial structure and disclosure quality within developing economies such as Iraq. We add new evidence on the distinct transmission channels of lending versus deposit rates within transitioning banking systems, utilizing panel data from ten Iraqi commercial banks over the period 2013–2022 to highlight the particular sensitivity of emerging market institutions to these dual, potentially offsetting mechanisms.