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Banking fragility and distress: An econometric study of macroeconomic determinants

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  • Pesola , Jarmo

    ()
    (Bank of Finland Research)

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    Abstract

    The macroeconomic determinants of banking sector distresses in the Nordic countries, Belgium, Ger-many, Greece, Spain and the UK are analysed using an econometric model estimated on panel data from partly the early 1980s to 2002. The dependent variable is the ratio of banks’ loan losses to lending. In ad-dition to the lagged dependent variable, the explanatory variables include a surprise change in incomes and real interest rates, both variables as a separate cross-product term with lagged aggregate indebtedness. The underlying macroeconomic account that this paper puts forward is that loan losses are basically gen-erated by strong adverse aggregate shocks under high exposure of banks to such shocks. The underlying innovations to income and real interest rates are constructed using published macro-economic forecast for these variables. According to the results, high customer indebtedness combined with adverse macroeco-nomic surprise shocks to income and real interest rates contributed to the distress in banking sector. Loan losses also display strong autoregressive behaviour which might indicate a feedback effect from loan losses back to macroeconomic level in deep recessions. The results can be used in macro stress-testing the banking sector.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0513netti.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 13/2005.

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    Length: 100 pages
    Date of creation: 11 Jul 2005
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2005_013

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    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Keywords: financial fragility; shock; loan loss; banking crisis;

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    References

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    1. Dell'Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram, 2008. "The real effect of banking crises," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 89-112, January.
    2. Goetz von Peter, 2004. "Asset prices and banking distress: a macroeconomic approach," BIS Working Papers 167, Bank for International Settlements.
    3. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
    4. Paul Louis Ceriel Hilbers & Alfredo Mario Leone & Mahinder Singh Gill & Owen Evens, 2000. "Macroprudential Indicators of Financial System Soundness," IMF Occasional Papers 192, International Monetary Fund.
    5. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, EconWPA.
    6. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
    7. Bhattacharya, Sudipto & Boot, Arnoud & Thakor, Anjan (ed.), 2004. "Credit, Intermediation, and the Macroeconomy: Readings and Perspectives in Modern Financial Theory," OUP Catalogue, Oxford University Press, number 9780199243068, September.
    8. Hansen, Jan, 2003. "Financial Cycles and Bankruptcies in the Nordic Countries," Working Paper Series 149, Sveriges Riksbank (Central Bank of Sweden).
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    Cited by:
    1. Grigori Fainstein & Igor Novikov, 2011. "The Comparative Analysis of Credit Risk Determinants In the Banking Sector of the Baltic States," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 20-45, June.
    2. Chang, E.J. & Guerra, S.M. & Lima, E.J.A. & Tabak, B.M., 2008. "The stability-concentration relationship in the Brazilian banking system," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(4), pages 388-397, October.
    3. Grigori Fainstein & Igor Novikov, 2011. "The role of macroeconomic determinants in credit risk measurement in transition country: Estonian example," International Journal of Transitions and Innovation Systems, Inderscience Enterprises Ltd, vol. 1(2), pages 117-137.
    4. Castro, Vítor, 2013. "Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI," Economic Modelling, Elsevier, vol. 31(C), pages 672-683.
    5. Beckmann, Rainer, 2007. "Profitability of Western European banking systems: panel evidence on structural and cyclical determinants," Discussion Paper Series 2: Banking and Financial Studies 2007,17, Deutsche Bundesbank, Research Centre.
    6. Adam Głogowski, 2008. "Macroeconomic determinants of Polish banks’ loan losses – results of a panel data study," National Bank of Poland Working Papers 53, National Bank of Poland, Economic Institute.

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