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

  • Costeiu, Adrian
  • Neagu, Florian

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

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Paper provided by European Central Bank in its series Working Paper Series with number 1592.

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Date of creation: Sep 2013
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Handle: RePEc:ecb:ecbwps:20131592
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  1. Virolainen , Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Research Discussion Papers 18/2004, Bank of Finland.
  2. 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.
  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. De Bandt, O. & Bruneau, C. & El Amri, W., 2008. "Stress Testing and Corporate Finance," Working papers 203, Banque de France.
  5. 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.
  6. David Vivet, 2011. "Development of a financial health indicator based on companies’ annual accounts," Working Paper Document 213, National Bank of Belgium.
  7. 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.
  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. 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, 09.
  10. 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.
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