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

International Monetary Fund Working Paper No. WP/16/236

28 Pages Posted: 12 Dec 2016 Last revised: 8 Mar 2018

See all articles by Francesco Grigoli

Francesco Grigoli

International Monetary Fund (IMF)

Mario Mansilla

International Monetary Fund (IMF)

Martin Saldias

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: December 7, 2016

Abstract

We propose a stress testing framework of credit risk, which analyzes macro-financial linkages, generates consistent forecasts of macro-financial variables, and projects NPL on the basis of such forecasts. Economic contractions are generally associated with increases in non-performing loans (NPL). However, despite the common assumption used in the empirical literature of homogenous 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.

Keywords: banks, cross-sectional dependence, macro-financial linkages, non-performing loans, credit stress test

JEL Classification: C53, E44, G21

Suggested Citation

Grigoli, Francesco and Mansilla, Mario and Saldias, Martin, Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections: An Application to Ecuador (December 7, 2016). International Monetary Fund Working Paper No. WP/16/236. Available at SSRN: https://ssrn.com/abstract=2883687 or http://dx.doi.org/10.2139/ssrn.2883687

Francesco Grigoli

International Monetary Fund (IMF) ( email )

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

Mario Mansilla

International Monetary Fund (IMF) ( email )

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

Martin Saldias (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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