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Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections; An Application to Ecuador

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  • Francesco Grigoli
  • Mario Mansilla
  • Martín Saldías

Abstract

We propose a stress testing framework of credit risk, which analyzes macro-financial linkages, generates consistent forecasts of macro-financial variables, and projects non-performing loans (NPL) on the basis of such forecasts. Economic contractions are generally associated with increases in NPL. However, despite the common assumption used in the empirical literature of homogeneous 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. Our approach accounts for banks’ heterogeneous reaction to macro-financial shocks in a dynamic context and potential cross-sectional dependence across banks caused by common shocks. An application to Ecuador suggests that substantial heterogeneity is present and that this should be taken into account when trying to anticipate inflections in the quality of portfolio.

Suggested Citation

  • Francesco Grigoli & Mario Mansilla & Martín Saldías, 2016. "Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections; An Application to Ecuador," IMF Working Papers 2016/236, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2016/236
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    2. Cheikh A. Gueye & Asithandile Mbelu & Amadou N Sy, 2019. "Coping with Falling Oil Prices: The Different Fortunes of African Banks," IMF Working Papers 2019/129, International Monetary Fund.
    3. 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

    Nonperforming loans; Banking; Credit; Oil prices; Vector autoregression; WP; NPL ratio;
    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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