Iranian Financial Engineering Association(IFEA) International Journal of Finance & Managerial Accounting 2588-4379 Articles in Press 2026 05 30 The Impact of Banks’ Phantom (Unrealized) Profits on Financial Instability and Credit Cycles in Iran’s Economy 24376 10.22034/ijfma.2025.78853.2320 EN Nima Shahbazi Department of Financial Management, Science and Research Branch, Islamic Azad University, Tehran, Iran Abdolah Pakdel Moghanlu Department of Accounting, Ardabil Branch, Islamic Azad University, Ardabil, Iran Mohammad Javad Sheikh Department of Accounting, Kharazmi University, Tehran, Iran Abbas Ali Daryaei Department of Accounting, Imam Khomeini International University, Qazvin, Iran 0000-0002-7290-5701 Journal Article 2025 10 04 Banking system stability is a cornerstone of economic resilience. This paper investigates the role of banks’ Phantom (Unrealized) profits—a hidden source of vulnerability—in shaping financial instability and credit cycles in Iran. The sample covers 21 banks and credit institutions listed on the Tehran Stock Exchange during 2011–2023. The Phantom profit index is defined as the gap between realized profits and reported profits, adjusted for accrual-based items. Using a system of simultaneous equations estimated via the two-stage least squares (2SLS) method in EViews 13, the results show that Phantom profits have a positive and significant effect on both financial instability and the amplitude of credit cycles. These profits increase systemic fragility and intensify credit expansions beyond sustainable levels. Control variables—bank size, leverage, and capital adequacy—also influence these dynamics, with mixed effects on stability and systemic risk. Overall, the findings suggest that Phantom profits not only magnify instability but also trigger artificial credit booms, followed by sharp contractions as systemic risk rises. Restricting and monitoring such profits emerges as a critical policy tool for enhancing financial stability and sustaining healthy credit flows in Iran’s banking sector.