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Simple forecasts of bank loan quality in the business cycle

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  • Michele Gambera
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    Abstract

    Experience from models such as SEER suggests that bank financial condition predict bank failures. However, it has been difficult to find a relationship between macroeconomic variables and bank failures. This paper shows ways in which simple time-series techniques can be used to forecast financial conditions of banks. The models include macroeconomic variables in order to consider systemic cyclical factors in forecasting. In addition, analysis of regression residuals is used to obtain relatively early warnings of unusual performance. ; The empirical result suggest that a limited number of regional and national macroeconomic variables are often good predictors for problem-loan ratios, and that simple, bivariate VAR systems of one bank variable, one macroeconomic variable, and seasonal dummies can be quite effective. These variables include bankruptcy filings, farm income (particularly for states where farming has important role), state annual product, housing permits, and unemployment. Analysis of the residuals is shown to be an interesting tool to detect unexpected changes in past-due loans. Impulse-response functions are a result of VAR estimation, which can be used for scenario analysis.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Chicago in its journal Emerging Issues.

    Volume (Year): (2000)
    Issue (Month): Apr ()
    Pages:

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    Handle: RePEc:fip:fedhei:y:2000:i:apr:n:sr-00-3

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    Related research

    Keywords: Bank loans ; Bank failures ; Business cycles;

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    Cited by:
    1. Stefano Puddu, 2013. "Real Sector and Banking System: Real and Feedback Effects. A Non-Linear VAR Approach," IRENE Working Papers 13-01, IRENE Institute of Economic Research.
    2. Marcucci, Juri & Quagliariello, Mario, 2008. "Is bank portfolio riskiness procyclical: Evidence from Italy using a vector autoregression," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 46-63, February.
    3. Athanasoglou, Panayiotis P. & Daniilidis, Ioannis & Delis, Manthos D., 2014. "Bank procyclicality and output: Issues and policies," Journal of Economics and Business, Elsevier, vol. 72(C), pages 58-83.
    4. Love, Inessa & Turk Ariss, Rima, 2014. "Macro-financial linkages in Egypt: A panel analysis of economic shocks and loan portfolio quality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 158-181.
    5. Guglielmo Maria Caporale & Stefano Di Colli & Juan Sergio Lopez, 2013. "Bank Lending Procyclicality and Credit Quality during Financial Crises," Discussion Papers of DIW Berlin 1309, DIW Berlin, German Institute for Economic Research.
    6. Mario Quagliariello, . "Banks' Performance over the Business Cycle: A Panel Analysis on Italian Intermediaries," Discussion Papers 04/17, Department of Economics, University of York.
    7. Beatty, Anne & Liao, Scott, 2011. "Do delays in expected loss recognition affect banks' willingness to lend?," Journal of Accounting and Economics, Elsevier, vol. 52(1), pages 1-20, June.
    8. Mario Quagliariello, 2006. "Macroeconomics Uncertainty and Banks' Lending Decisions: The Case of Italy," Discussion Papers 06/02, Department of Economics, University of York.
    9. Bruna Škarica, 2013. "Determinants of Non-Performing Loans in Central and Eastern European Countries," EFZG Working Papers Series 1307, Faculty of Economics and Business, University of Zagreb.
    10. Festic, Mejra & Kavkler, Alenka & Repina, Sebastijan, 2011. "The macroeconomic sources of systemic risk in the banking sectors of five new EU member states," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 310-322, February.
    11. Marcucci, Juri & Quagliariello, Mario, 2009. "Asymmetric effects of the business cycle on bank credit risk," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1624-1635, September.
    12. Simona Castellani & Chiara Pederzoli & Costanza Torricelli, 2008. "Indebtedness, macroeconomic conditions and banks’ loan losses: evidence from Italy," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 08014, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
    13. Ivan Baboucek & Martin Jancar, 2005. "Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio," Working Papers 2005/01, Czech National Bank, Research Department.

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