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Indebtedness, macroeconomic conditions and banks’ loan losses: evidence from Italy

  • Simona Castellani

    ()

  • Chiara Pederzoli

    ()

  • Costanza Torricelli

    ()

The Basel II capital accord has fostered the debate over the financial stability of the aggregate banking sector. There is a large empirical literature focused on the effects of macroeconomic disturbances on the banking system. Specifically, loan losses are an important factor for the banking stability and a stream of research in this field aims to identify explanatory variables for this critical indicator. This paper focuses on Italian banks data over the period 1990-2007 and investigates the relationship between the ratio of non-performing loans to total loans, the business cycle and firms’ indebtedness so as to test the impact of both real and financial fragility on banks’ default losses. We use a regression model with an interaction term representing the joint effect of real and financial fragility, which to our knowledge has never been applied before to Italian default data. The results show that the impact of financial fragility on default losses is enhanced by adverse economic conditions.

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File URL: http://www.cefin.unimore.it/sites/default/files/Castel-Ped-Tor-CEFIN.pdf
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Paper provided by Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi" in its series Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) with number 08014.

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Length: pages 17
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:mod:wcefin:08014
Contact details of provider: Web page: http://www.economia.unimore.it

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  1. Andrew P. Meyer & Timothy J. Yeager, 2001. "Are small rural banks vulnerable to local economic downturns?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 25-38.
  2. Michele Gambera, 2000. "Simple forecasts of bank loan quality in the business cycle," Emerging Issues, Federal Reserve Bank of Chicago, issue Apr.
  3. Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Marcucci, Juri & Quagliariello, Mario, 2008. "Is bank portfolio riskiness procyclical: Evidence from Italy using a vector autoregression," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 46-63, February.
  5. Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements.
  6. Edward I. Altman & Andrea Resti & Andrea Sironi, 2002. "The link between default and recovery rates: effects on the procyclicality of regulatory capital ratios," BIS Working Papers 113, Bank for International Settlements.
  7. Juri Marcucci & Mario Quagliariello, 2008. "Credit risk and business cycle over different regimes," Temi di discussione (Economic working papers) 670, Bank of Italy, Economic Research and International Relations Area.
  8. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, 2005. "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England.
  9. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Research Discussion Papers 6/2001, Bank of Finland.
  10. Ayuso, Juan & Perez, Daniel & Saurina, Jesus, 2004. "Are capital buffers pro-cyclical?: Evidence from Spanish panel data," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 249-264, April.
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