Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections: An Application to Ecuador
IMF Working Papers, December 7, 2016
Source details
- Canonical URL
- Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections: An Application to Ecuador
Other formats
Bibliographic details
- Authors: Francesco Grigoli, Mario Mansilla, Martín Saldías
- Published: December 7, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475559347.001
Summary of the framework
- Proposes a stress testing framework of credit risk that:
- Analyzes macro-financial linkages.
- Generates consistent forecasts of macro-financial variables.
- Projects non-performing loans (NPL) on the basis of such forecasts.
- Key premise: Economic contractions are generally associated with increases in NPL.
- Challenges common empirical assumption of homogeneous impact across banks and instead:
- Accounts for banks’ heterogeneous reaction to macro-financial shocks in a dynamic context.
- Accounts for potential cross-sectional dependence across banks caused by common shocks.
Major findings and application to Ecuador
- An application to Ecuador suggests:
- Substantial heterogeneity is present across banks in how macro-financial shocks affect NPL.
- Imposing homogeneity may lead to overestimating or underestimating the resilience of the financial system to macroeconomic shocks.
- Heterogeneity should be taken into account when trying to anticipate inflections in the quality of loan portfolios.
Methodology and technical features
- Analytical components:
- Dynamic modeling of banks’ heterogeneous responses to macro-financial shocks.
- Treatment of cross-sectional dependence across banks due to common shocks.
- Econometric and modeling tools referenced in the content and keywords:
- Vector autoregression.
- Panel data estimation.
- Difference GMM estimator.
- Likelihood-ratio test statistic.
- Regression equation formulation for NPL projection.
- Subject areas listed: Banking, Credit, Econometric analysis, Financial crises, Financial institutions, Global financial crisis of 2008-2009, Money, Nonperforming loans, Oil prices, Prices, Vector autoregression.
Policy relevance and stress-testing implications
- Stress-testing implications:
- Stress tests that assume homogeneous bank responses to macro-financial shocks risk mismeasuring system resilience.
- Incorporating bank-level heterogeneity and cross-sectional dependence leads to more accurate projections of NPL under macroeconomic stress.
- Practical recommendation:
- When anticipating changes in portfolio quality, take into account bank-specific sensitivities to macro-financial variables rather than relying on uniform effects.
Content in this bundle
- 1. Panel Regression Results