Nonperforming Loans in the GCC Banking System and Their Macroeconomic Effects

25 Pages Posted: 1 Feb 2011

See all articles by Raphael A. Espinoza

Raphael A. Espinoza

International Monetary Fund (IMF)

A. Prasad

International Monetary Fund (IMF)

Date Written: October 2010

Abstract

According to a dynamic panel estimated over 1995-2008 on around 80 banks in the GCC region, the NPL ratio worsens as economic growth becomes lower and interest rates and risk aversion increase. Our model implies that the cumulative effect of macroeconomic shocks over a three year horizon is indeed large. Firm-specific factors related to risk-taking and efficiency are also related to future NPLs. The paper finally investigates the feedback effect of increasing NPLs on growth using a VAR model. According to the panel VAR, there could be a strong, albeit short-lived feedback effect from losses in banks’ balance sheets on economic activity, with a semi-elasticity of around '34.

Keywords: Bank accounting, Banking systems, Banks, Cooperation Council for the Arab States of the Gulf, Credit risk, Economic models, Loans

Suggested Citation

Espinoza, Raphael A. and Prasad, Ananthakrishnan, Nonperforming Loans in the GCC Banking System and Their Macroeconomic Effects (October 2010). IMF Working Papers, Vol. , pp. 1-24, 2010. Available at SSRN: https://ssrn.com/abstract=1750712

Raphael A. Espinoza (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://oxford.academia.edu/RaphaelEspinoza

Ananthakrishnan Prasad

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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