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

Francesco Grigoli, Mario Mansilla and Martin Saldias

No 2016/236, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; NPL ratio; banks; cross-sectional dependence; heterogeneity; macro-financial linkages; non-performing loans; stress test; NPL projection; panel dataset; likelihood-ratio test statistic; panel data estimation; difference GMM estimator; bank level; surge in nonperforming loans; loan portfolio; regression equation; Nonperforming loans; Credit; Oil prices; Vector autoregression; Global financial crisis of 2008-2009; Global (search for similar items in EconPapers)
Pages: 28
Date: 2016-12-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Macro-financial linkages and heterogeneous non-performing loans projections: An application to Ecuador (2018)
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