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Nonperforming Loans and Macrofinancial Vulnerabilities in Advanced Economies

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  • Mwanza Nkusu
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    Abstract

    We analyze the link between nonperforming loans (NPL) and macroeconomic performance using two complementary approaches. First, we investigate the macroeconomic determinants of NPL in panel regressions and confirm that adverse macroeconomic developments are associated with rising NPL. Second, we investigate the feedback between NPL and its macroeconomic determinants in a panel vector autoregressive (PVAR) model. The impulse response functions (IRFs) attribute to NPL a central role in the linkages between credit market frictions and macrofinancial vulnerability. They suggest that a sharp increase in NPL triggers long-lived tailwinds that cripple macroeconomic performance from several fronts.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/161.

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    Length: 27
    Date of creation: 01 Jul 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/161

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    Related research

    Keywords: Banks; Credit risk; Developed countries; Economic models; banking; banking crises; cointegration; statistics; equation; standard deviation; banks ? balance sheets; standard errors; var model; correlations; logarithm; samples; standard error; econometrics; banks ? loan; bank credit; banking system distress; time series; probability; financial statistics; banking sector; equations; correlation; banking systems; bank policy; vector autoregression; bank of greece; autocorrelation; banking system; covariance; mortgage loan; dummy variable; significance level; statistic; forecasting; predictions; sample size; bank portfolio; bank insolvencies; diagonal matrix; bankruptcies; prediction; banking crisis; bank capital; finite sample; linear trend; stationary process; bank for international settlements; polynomial; significance levels;

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    14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    15. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer, vol. 22(3), pages 203-224, December.
    16. Raphael A. Espinoza & Ananthakrishnan Prasad, 2010. "Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects," IMF Working Papers 10/224, International Monetary Fund.
    17. Cottarelli, Carlo & Dell'Ariccia, Giovanni & Vladkova-Hollar, Ivanna, 2005. "Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in Central and Eastern Europe and in the Balkans," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 83-104, January.
    18. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
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    Cited by:
    1. Josef Schreiner, 2011. "Developments in Selected CESEE Countries: Deteriorating External Demand and Rising Risk Aversion Increasingly Weigh on Growth in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4.
    2. 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.
    3. Dimitrios P. Louzis & Aggelos T. Vouldis & Vasilios L. Metaxas, 2010. "Macroeconomic and bank-specific determinants of non-performing loans in Greece: a comparative study of mortgage, business and consumer loan portfolios," Working Papers 118, Bank of Greece.
    4. Pan, Huiran & Wang, Chun, 2013. "House prices, bank instability, and economic growth: Evidence from the threshold model," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1720-1732.
    5. 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.
    6. Reinout De Bock & Alexander Demyanets, 2012. "Bank Asset Quality in Emerging Markets," IMF Working Papers 12/71, International Monetary Fund.
    7. Rodrigo Lara Pinto & Gilneu Francisco Astolfi Vivan, 2013. "Converting the NPL Ratio into a Comparable Long Term Metric," Working Papers Series 309, Central Bank of Brazil, Research Department.
    8. 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.
    9. Eftychia Nikolaidou & Sofoklis Vogiazas, 2014. "Credit Risk Determinants for the Bulgarian Banking System," International Advances in Economic Research, Springer, vol. 20(1), pages 87-102, February.

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