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

Author/Editor:

Francesco Grigoli ; Mario Mansilla ; Martín Saldías

Publication Date:

December 7, 2016

Electronic Access:

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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 NPL on the basis of such forecasts. Economic contractions are generally associated with increases in non-performing loans (NPL). However, despite the common assumption used in the empirical literature of homogenous 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.

Series:

Working Paper No. 16/236

Subject:

English

Publication Date:

December 7, 2016

ISBN/ISSN:

9781475559347/1018-5941

Stock No:

WPIEA2016236

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

28

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