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Bridging the banking sector with the real economy: a financial stability perspective

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  • Costeiu, Adrian
  • Neagu, Florian

Abstract

This paper builds a macro-prudential tool designed to assess whether the banking sector is adequately prepared to orderly withstand losses resulting from normal or stressed macroeconomic and microeconomic scenarios. The link between the banking sector and the real sector is established via the corporate sector channel. The macro-prudential tool consists of a two-step approach. In the first step, we build a model for the probability of default (PD) in the corporate sector, so as to quantify oneyear ahead developments in the quality of banks' corporate loans. The framework is established using micro data, with a bottom-up approach. The second step consists of bridging the PD model with a macroeconomic module in order to capture the feedback effects from the macroeconomic stance into the banking sector, via the corporate sector channel. The macro-prudential tool is tested on the Romanian economy. JEL Classification: G32, G21, E17

Suggested Citation

  • Costeiu, Adrian & Neagu, Florian, 2013. "Bridging the banking sector with the real economy: a financial stability perspective," Working Paper Series 1592, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131592
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    File URL: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1592.pdf
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    References listed on IDEAS

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    1. de Bandt, O. & Bruneau, C. & El Amri, W., 2008. "Stress testing and corporate finance," Journal of Financial Stability, Elsevier, vol. 4(3), pages 258-274, September.
    2. Engelmann, Bernd & Hayden, Evelyn & Tasche, Dirk, 2003. "Measuring the Discriminative Power of Rating Systems," Discussion Paper Series 2: Banking and Financial Studies 2003,01, Deutsche Bundesbank.
    3. Lennox, Clive, 1999. "Identifying failing companies: a re-evaluation of the logit, probit and DA approaches," Journal of Economics and Business, Elsevier, vol. 51(4), pages 347-364, July.
    4. Philip Bunn & Victoria Redwood, 2003. "Company accounts based modelling of business failures and the implications for financial stability," Bank of England working papers 210, Bank of England.
    5. Petr JAKUBÍK, 2007. "Macroeconomic Environment and Credit Risk (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 60-78, March.
    6. repec:bla:joares:v:4:y:1966:i::p:71-111 is not listed on IDEAS
    7. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    8. Petr Jakubík, 2011. "Household Balance Sheets and Economic Crisis," Working Papers IES 2011/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.
    9. Romulus Mircea, 2008. "Credit risk of non-financial companies in the context of financial stability," Advances in Economic and Financial Research - DOFIN Working Paper Series 4, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
    10. Malhotra, Manoj K. & Sharma, Subhash & Nair, Satish S., 1999. "Decision making using multiple models," European Journal of Operational Research, Elsevier, vol. 114(1), pages 1-14, April.
    11. repec:bla:joares:v:18:y:1980:i:1:p:109-131 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Neagu, Florian & Mihai, Irina, 2013. "Sudden stop of capital flows and the consequences for the banking sector and the real economy," Working Paper Series 1591, European Central Bank.
    2. repec:eee:ecmode:v:69:y:2018:i:c:p:181-192 is not listed on IDEAS

    More about this item

    Keywords

    Financial Stability; macro-prudential analysis; probability of default; ROC;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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