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Indebtedness, macroeconomic conditions and banks’ loan losses: evidence from Italy

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Author Info
Simona Castellani ()
Chiara Pederzoli ()
Costanza Torricelli ()

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Abstract

The Basel II capital accord has fostered the debate over the financial stability of the aggregate banking sector. There is a large empirical literature focused on the effects of macroeconomic disturbances on the banking system. Specifically, loan losses are an important factor for the banking stability and a stream of research in this field aims to identify explanatory variables for this critical indicator. This paper focuses on Italian banks data over the period 1990-2007 and investigates the relationship between the ratio of non-performing loans to total loans, the business cycle and firms’ indebtedness so as to test the impact of both real and financial fragility on banks’ default losses. We use a regression model with an interaction term representing the joint effect of real and financial fragility, which to our knowledge has never been applied before to Italian default data. The results show that the impact of financial fragility on default losses is enhanced by adverse economic conditions.

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Publisher Info
Paper provided by Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi" in its series Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) with number 08014.

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Length: pages 17
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:mod:wcefin:08014

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Related research
Keywords: default; GDP; financial fragility;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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  1. repec:fth:bfdipa:6/2001 is not listed on IDEAS
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  7. Michele Gambera, 2000. "Simple forecasts of bank loan quality in the business cycle," Emerging Issues, Federal Reserve Bank of Chicago, issue Apr. [Downloadable!]
  8. 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. [Downloadable!] (restricted)
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  9. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Research Discussion Papers 6/2001, Bank of Finland. [Downloadable!]
  10. Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002. "Ratings migration and the business cycle, with application to credit portfolio stress testing," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 445-474, March. [Downloadable!] (restricted)
    Other versions:
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