{
  "title": "Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections: An Application to Ecuador",
  "publication": "IMF Working Papers, December 7, 2016",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/macro-financial-linkages-and-heterogeneous-non-performing-loans-projections-an-application-44446",
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  "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.",
  "sections": [
    {
      "heading": "Summary of the framework",
      "content": "- Proposes a stress testing framework of credit risk that:\n  - Analyzes macro-financial linkages.\n  - Generates consistent forecasts of macro-financial variables.\n  - Projects non-performing loans (NPL) on the basis of such forecasts.\n- Key premise: Economic contractions are generally associated with increases in NPL.\n- Challenges common empirical assumption of homogeneous impact across banks and instead:\n  - Accounts for banks’ heterogeneous reaction to macro-financial shocks in a dynamic context.\n  - Accounts for potential cross-sectional dependence across banks caused by common shocks."
    },
    {
      "heading": "Major findings and application to Ecuador",
      "content": "- An application to Ecuador suggests:\n  - Substantial heterogeneity is present across banks in how macro-financial shocks affect NPL.\n  - Imposing homogeneity may lead to overestimating or underestimating the resilience of the financial system to macroeconomic shocks.\n  - Heterogeneity should be taken into account when trying to anticipate inflections in the quality of loan portfolios."
    },
    {
      "heading": "Methodology and technical features",
      "content": "- Analytical components:\n  - Dynamic modeling of banks’ heterogeneous responses to macro-financial shocks.\n  - Treatment of cross-sectional dependence across banks due to common shocks.\n- Econometric and modeling tools referenced in the content and keywords:\n  - Vector autoregression.\n  - Panel data estimation.\n  - Difference GMM estimator.\n  - Likelihood-ratio test statistic.\n  - Regression equation formulation for NPL projection.\n- 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."
    },
    {
      "heading": "Policy relevance and stress-testing implications",
      "content": "- Stress-testing implications:\n  - Stress tests that assume homogeneous bank responses to macro-financial shocks risk mismeasuring system resilience.\n  - Incorporating bank-level heterogeneity and cross-sectional dependence leads to more accurate projections of NPL under macroeconomic stress.\n- Practical recommendation:\n  - When anticipating changes in portfolio quality, take into account bank-specific sensitivities to macro-financial variables rather than relying on uniform effects.\n\n---\n\n Content in this bundle\n\n- 1. Panel Regression Results\n  - 1. Panel Regression Results (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 1. Panel Regression Results (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/macro-financial-linkages-and-heterogeneous-non-performing-loans-projections-an-application-44446"
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    "Authors: Francesco Grigoli, Mario Mansilla, Martín Saldías",
    "Published: December 7, 2016",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475559347.001",
    "Proposes a stress testing framework of credit risk that:",
    "Key premise: Economic contractions are generally associated with increases in NPL.",
    "Challenges common empirical assumption of homogeneous impact across banks and instead:",
    "An application to Ecuador suggests:",
    "Analytical components:",
    "Econometric and modeling tools referenced in the content and keywords:",
    "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.",
    "Stress-testing implications:",
    "Practical recommendation:",
    "**1. Panel Regression Results**"
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