Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections: An Application to Ecuador

By Francesco Grigoli, Mario Mansilla, Martín Saldías

December 7, 2016

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Francesco Grigoli, Mario Mansilla, and Martín Saldías. Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections: An Application to Ecuador, (USA: International Monetary Fund, 2016) accessed November 9, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We propose a stress testing framework of credit risk, which analyzes macro-financial linkages, generates consistent forecasts of macro-financial variables, and projects non-performing loans (NPL) on the basis of such forecasts. Economic contractions are generally associated with increases in NPL. However, despite the common assumption used in the empirical literature of homogeneous impact across banks, the strength of this relationship is often bank-specific, and imposing homogeneity may lead to over or underestimating the resilience of the financial system to macroeconomic woes. Our approach accounts for banks’ heterogeneous reaction to macro-financial shocks in a dynamic context and potential cross-sectional dependence across banks caused by common shocks. An application to Ecuador suggests that substantial heterogeneity is present and that this should be taken into account when trying to anticipate inflections in the quality of portfolio.

Subject: Banking, Credit, Econometric analysis, Financial crises, Financial institutions, Global financial crisis of 2008-2009, Money, Nonperforming loans, Oil prices, Prices, Vector autoregression

Keywords: Bank level, Banks, Credit, Cross-sectional dependence, Difference GMM estimator, Global, Global financial crisis of 2008-2009, Heterogeneity, Likelihood-ratio test statistic, Loan portfolio, Macro-financial linkages, Non-performing loans, Nonperforming loans, NPL projection, NPL ratio, Oil prices, Panel data estimation, Panel dataset, Regression equation, Stress test, Surge in nonperforming loans, Vector autoregression, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/236
Stock No:

WPIEA2016236
ISBN:

9781475559347
ISSN:

1018-5941

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