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The Interplay between Ex-post Credit Risk and the Cycles: Evidence from the Italian banks

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  • Anastasiou, Dimitrios

Abstract

The objective of this research is to empirically examine if both credit and business cycle affect the ex-post credit risk (i.e. non-performing loans) in the banking system of Italy. My sample includes 47 Italian banks for the period 1995Q1-2015Q1. The increase in NPLs post-2008 has put into question the robustness of many European banks and the stability of the whole sector. It still remains a serious challenge, especially in Italy which is one of the countries that has been hit by the financial crisis more than other economies. By employing Fixed Effects, Random Effects and GMM as econometric methodologies I find a positive (negative) association between credit cycle (business cycle) and NPLs. Higher NPLs in Italy are due to adverse macroeconomic conditions (i.e. downward phase of the business cycle) and due to excess credit (i.e. upward phase of the credit cycle). Another important finding is that the Italian NPLs have a symmetric sensitivity between both business and credit cycle. Such findings may be helpful for both senior bank loan officers and policy makers when designing macro-prudential as well as NPL resolution policies.

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  • Anastasiou, Dimitrios, 2017. "The Interplay between Ex-post Credit Risk and the Cycles: Evidence from the Italian banks," MPRA Paper 79470, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:79470
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    2. Dimitrios Anastasiou & Konstantinos Drakos & Stylianos Giannoulakis, 2018. "Are Bank Credit Standards Affected by the Business Cycle? Evidence from the Euro Area," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 64(1), pages 5-16.

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    More about this item

    Keywords

    Non-performing loans; Ex-post credit risk; Business cycle; Credit cycle; Macro-prudential policy; Italian Banks.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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