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Macro-financial linkages and heterogeneous non-performing loans projections: An application to Ecuador

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  • Grigoli, Francesco
  • Mansilla, Mario
  • Saldías, Martín

Abstract

Economic contractions are generally associated with increases in NPL ratios. However, despite the common assumption used in the empirical literature of homogenous impact across banks, the strength of this relationship is often bank-specific, and imposing homogeneity may lead to over- or underestimating the resilience of the financial system to macroeconomic woes. We introduce a three-stage approach to generate forecasts of macro-financial variables and project non-performing loans (NPLs) in a way that accounts for banks’ heterogeneous reactions to macro-financial shocks in a dynamic context and for potential cross-sectional dependence across banks caused by common shocks. An application to Ecuador suggests that both substantial heterogeneity and cross-sectional dependence are present and that should be taken into account when trying to anticipate inflections in the quality of the portfolio.

Suggested Citation

  • Grigoli, Francesco & Mansilla, Mario & Saldías, Martín, 2018. "Macro-financial linkages and heterogeneous non-performing loans projections: An application to Ecuador," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 130-141.
    • Handle: RePEc:eee:jbfina:v:97:y:2018:i:c:p:130-141
    DOI: 10.1016/j.jbankfin.2018.09.023
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    4. Faaza Fakhrunnas & Rindang Nuri Isnaini Nugrohowati & Razali Haron & Mohammad Bekti Hendrie Anto, 2022. "The Determinants of Non-Performing Loans in the Indonesian Banking Industry: An Asymmetric Approach Before and During the Pandemic Crisis," SAGE Open, , vol. 12(2), pages 21582440221, June.
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    6. Cheikh A. Gueye & Asithandile Mbelu & Mr. Amadou N Sy, 2019. "Coping with Falling Oil Prices: The Different Fortunes of African Banks," IMF Working Papers 2019/129, International Monetary Fund.
    7. Chuluunbayar, Delgerjargal, 2020. "Macroeconomic determinants of non-performing loans in Mongolia: the influence of currency mismatch and bank size," MPRA Paper 101843, University Library of Munich, Germany.

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    More about this item

    Keywords

    Banks; Cross-sectional dependence; Ecuador; Heterogeneity; Macro-financial linkages; Non-performing loans;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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