Analysis of Tail Dependence between Sovereign Debt Distress and Bank Non-Performing Loans

Abstract

We investigate the tail dependence between sovereign debt distress and bank non-performing loans (NPLs) using a large sample of developed and emerging countries in recent decades. Considering the feedback loop of sovereign debt and bank loan distress, we use three copula models to analyze the asymmetry of tail dependence structure between sovereign debt exposure and bank NPLs. We use the Gaussian copula marginal regression to control the concurrent impact of other macroeconomic variables. We provide evidence that sovereign debt indicates an important determinant of NPLs. We also find that there is tail dependence between sovereign debt distress and bank NPLs, whereas the tail dependence coefficients vary across countries. Our findings shed light on the influence of fiscal distress on bank loan distress and provide immediate implications for the design of macro prudential and financial policy.

Government failures and non-performing loans in Asian countries

“…In what follows the contributions referring to Asian countries will be presented. Liu et al (2020) use the presence of a high public debt as proxy of government failure, to investigate its impact on NPLs, for a sample of 25 developed and emerging countries, among which there are India and China, for the time span 2006-2017. They offer support to the hypothesis that the importance of the relation between sovereign debt and NPLs, found for non-Asian countries, also applies to these two Asian regions.…”

“…These will be briefly discussed in what follows. Liu et al (2020) run a Gaussian copula marginal regression analysis, for each country, in which they use diverse control variables (GDP, the inflation rate, government fiscal expenditure and government fiscal revenue): the signs of the coefficients vary across countries. They outline a weakly significant negative coefficient for government fiscal revenue for India, and a strongly significant negative coefficient for inflation for China.…”

“…Liu et al. (2020) use the presence of a high public debt as proxy of government failure, to investigate its impact on NPLs, for a sample of 25 developed and emerging countries, among which there are India and China, for the time span 2006–2017.…”

“…Liu et al. (2020) run a Gaussian copula marginal regression analysis, for each country, in which they use diverse control variables (GDP, the inflation rate, government fiscal expenditure and government fiscal revenue): the signs of the coefficients vary across countries.…”

“…Arham et al., 2020); pool some Asian countries together with some other countries (e.g. Liu et al. , 2020) and consider a single country (Umar and Sun, 2018).…”