Spillovers and Long Run Difussion of Non-Performing Loans Risk

29 Pages Posted: 16 Sep 2011  

Renata Herrerias

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration

Jorge O. Moreno

School of Economics, UANL

Date Written: August 19, 2011

Abstract

This paper analyzes the diffusion and spillover effects of credit risk among banks within a banking system, using the Mexican financial system as a case study. Credit risk is measured by the non-performing loans ratio (NPL). Our method builds on work by Diebold and Yilmaz (2009) to decompose spillovers observed among banks’ portfolio risk. The method allows us to measure the long-run contributions of each bank’s risk on the rest of the banking system through the diffusion of risk among intermediaries. Moreover, we are able to gauge the relative importance of spillover by increasing the length of prediction periods for each bank’s NPL. Our estimations for the Mexican banking system between 2000 and 2010 suggest that the overall spillover effect index accounts for 60 to 75 percent of the observed variation and that the longer the time period we consider, the stronger this spillover effect is. Moreover, contrary to the common view, the spillover effect realized through the diffusion of risk is bidirectional between small and large banks, rather than only one type affecting the other

Keywords: Non-performing loans, credit risk, spillovers, systemic risk

JEL Classification: C58, G21, G32

Suggested Citation

Herrerias, Renata and Moreno, Jorge O., Spillovers and Long Run Difussion of Non-Performing Loans Risk (August 19, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1927982 or http://dx.doi.org/10.2139/ssrn.1927982

Renata Herrerias (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration ( email )

Rio Hondo No. 1
Progreso Tizapan
Mexico, D.F. 01080
Mexico
+52(55)56284000 x. 6535 (Phone)

HOME PAGE: http://administracion.itam.mx/

Jorge Omar Moreno Trevino

School of Economics, UANL ( email )

Av Lazaro Cardenas 4600 Ote
Fracc Residencial Las Torres
Monterrey, 64930
Mexico
528183294150 (Phone)

HOME PAGE: http://www.economia.uanl.mx/planta-docente/planta-docente/moreno-trevi-o-jorge-omar-dr.html

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