Estimating the Impact of Credit Risk Determinants in Two Southeast European Countries: A Non-Linear Structural VAR Approach

Abstract

We study the impact of credit risk determinants on the Romanian and Bulgarian banking systems using a structural Markov Regime-Switching vector autoregressive (MRS-SVAR) analysis. To capture changes in the domestic macroeconomic conditions as well as the spillover effects from the Greek crisis we account for endogenous breaks in the mean and/or volatility dynamics. Our empirical results suggest that an increase of interest rate also increases the Romanian and Bulgarian credit risk in the short-run while in the medium and in the long-run it reduced it. We also find evidence of spillover effects from the Greek crisis on both the Romanian and Bulgarian banking system which, interestingly, are imminent in the low volatility regime.

Keywords: credit risk, structural VAR, breaks, Markov Regime Switching

JEL Classification: C32, E44, E51, G21