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Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio

  • Ivan Baboucek
  • Martin Jancar

The paper concerns macro-prudential analysis. It uses an unrestricted VAR model to empirically investigate transmission involving a set of macroeconomic variables describing the development of the Czech economy and the functioning of its credit channel in the past eleven years. Its novelty lies in the fact that it provides the first systematic assessment of the links between loan quality and macroeconomic shocks in the Czech context. The VAR methodology is applied to monthly data transformed into percentage change. The out-of-sample forecast indicates that the most likely outlook for the quality of the banking sector's loan portfolio is that up to the end of 2006 the share of non-performing loans in it will follow a slightly downward trend below double-digit rates. The impulse response is augmented by stress testing exercises that enable us to determine a macroeconomic early warning signal of any worsening in the quality of banks' loans. The paper suggests that the Czech banking sector has attained a considerable ability to withstand a credit risk shock and that the banking sector's stability is compatible both with price stability and with economic growth. Despite being devoted to empirical investigation, the paper pays great attention to methodological issues. At the same time it tries to present both the VAR model and its results transparently and to openly discuss their weak points, which to a large degree can be attributed to data constraints or to the evolutionary nature of an economy in transition.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2005/01.

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Date of creation: Jan 2005
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Handle: RePEc:cnb:wpaper:2005/01
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  1. Thierry Timmermans, 2001. "Monitoring the macroeconomic determinants of banking system stability," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 117-137 Bank for International Settlements.
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  6. Tomas Holub & Martin Cihak, 2003. "Price Convergence: What Can the Balassa-Samuelson Model Tell Us?," Working Papers 2003/08, Czech National Bank, Research Department.
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  15. Marco Sorge, 2004. "Stress-testing financial systems: an overview of current methodologies," BIS Working Papers 165, Bank for International Settlements.
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  18. William R. Keeton, 1999. "Does faster loan growth lead to higher loan losses?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 57-75.
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  22. Michele Gambera, 2000. "Simple forecasts of bank loan quality in the business cycle," Emerging Issues, Federal Reserve Bank of Chicago, issue Apr.
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  24. Katerina Arnostova & Jaromir Hurnik, 2005. "The Monetary Transmission Mechanism in the Czech Republic (evidence from VAR analysis)," Working Papers 2005/04, Czech National Bank, Research Department.
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