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Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects

Author/Editor: Espinoza, Raphael A. | Prasad, Ananthakrishnan
Authorized for Distribution: October 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,082KB)
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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: According to a dynamic panel estimated over 1995 - 2008 on around 80 banks in the GCC region, the NPL ratio worsens as economic growth becomes lower and interest rates and risk aversion increase. Our model implies that the cumulative effect of macroeconomic shocks over a three year horizon is indeed large. Firm-specific factors related to risk-taking and efficiency are also related to future NPLs. The paper finally investigates the feedback effect of increasing NPLs on growth using a VAR model. According to the panel VAR, there could be a strong, albeit short-lived feedback effect from losses in banks’ balance sheets on economic activity, with a semi-elasticity of around 0.4.
 
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Series: Working Paper No. 10/224
Subject(s): Bank accounting | Banking systems | Banks | Cooperation Council for the Arab States of the Gulf | Credit risk | Economic models | Loans
Author's keyword(s): NPLs; macro-financial linkages; Gulf Cooperation Council; Stress-testing
 
English  
    Published:   October 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010224   Pages:   24
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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