Effects of economic variables on NPLs depending on the economic cycle

Serrano, Salvador Climent

doi:10.1007/s00181-017-1362-y

Cited by 9 publications

(3 citation statements)

References 29 publications

(19 reference statements)

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“…In the stream of literature relating NPLs' performance to macroeconomic variables, recently Climent-Serrano (2019) realized that factors in periods of economic growth are different compared to those in recession periods. Consequently, the author argues for considering the two stages (growth and recession) independently, investigating whether a structural break has taken place.…”

Section: Introductionmentioning

confidence: 99%

Forecasting the macro determinants of bank credit quality: a non-linear perspective

Fallanca

Forgione

Otranto

2020

JRF

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Purpose This study aims to propose a non-linear model to describe the effect of macroeconomic shocks on delinquency rates of three kinds of bank loans. Indeed, a wealth of literature has recognized significant evidence of the linkage between macro conditions and credit vulnerability, perceiving the importance of the high amount of bad loans for economic stagnation and financial vulnerability. Design/methodology/approach Generally, this linkage was represented by linear relationships, but the strong dependence of bank loan default on the economic cycle, subject to changes in regime, could suggest non-linear models as more appropriate. Indeed, macroeconomic variables affect the performance of bank’s portfolio loan, but such a relationship is subject to changes disturbing the stability of parameters along the time. This study is an attempt to model three different kinds of bank loan defaults and to forecast them in the case of the USA, detecting non-linear and asymmetric behaviors by the adoption of a Markov-switching (MS) approach. Findings Comparing it with the classical linear model, the authors identify evidence for the presence of regimes and asymmetries, changing in correspondence of the recession periods during the span of 1987–2017. Research limitations/implications The data are at a quarterly frequency, and more observations and more extended research periods could ameliorate the MS technique. Practical implications The good forecasting performance of this model could be applied by authorities to fine-tune their policies and deal with different types of loans and to diversify strategies during the different economic trends. In addition, bank management can refer to the performance of macroeconomic conditions to predict the performance of their bad loans. Originality/value The authors show a clear outperformance of the MS model concerning the linear one.

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Section: Introductionmentioning

confidence: 99%

Forecasting the macro determinants of bank credit quality: a non-linear perspective

Fallanca

Forgione

Otranto

2020

JRF

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“…However, the negative effect of non-performance loans on banking outcomes is likely to be non-linear since loan delinquency depends to a large extent on the economic cycle, being substantially greater during a recession (Climent-Serrano, 2019). In other words, the non-performing loans ratio rises as the financial recession progresses.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

Banking reforms and bank efficiency: Evidence for the collapse of Spanish savings banks

Blanco‐Oliver

2021

International Review of Economics & Finance

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“…The Sargan test and serial autocorrelation tests of second (AR(2)) and third order (AR(3)) are performed to test for orthogonality of the instruments. 12 Recall that periphery country banks accumulated relatively larger volumes of impaired loans on their balance sheets (Barba Navaretti et al 2017;Mansilla-Fernández 2017;Climent-Serrano 2019). Consequently, according…”

Section: The Effects Of Npls On the Cost Of Capitalmentioning

confidence: 99%

The dynamic effects of non-performing loans on banks’ cost of capital and lending supply in the Eurozone

Chiesa

Fernández

2020

Empirica

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This paper analyses the transmission channel from non-performing loans (NPLs) to the cost of capital, credit provision and liquidity creation in the banks of the Eurozone. The empirical results suggest that holdings of non-performing loans increase both the long-and short-term cost of capital for banks. Moreover, the less capitalized the bank, the greater the reduction in credit provision and liquidity creation due to the increased cost of capital. This phenomenon is found to be more economically significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.

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Effects of economic variables on NPLs depending on the economic cycle

Abstract: The author acknowledges the valuable comments and suggestions made by the anonymous referees of the review. The author wishes to thank the support of the Cátedra de Finanzas Internacionales-Banco Santander. Effects of economic variables on NPLs depending on the economic cycle

Cited by 9 publications

References 29 publications

Forecasting the macro determinants of bank credit quality: a non-linear perspective

Forecasting the macro determinants of bank credit quality: a non-linear perspective

Banking reforms and bank efficiency: Evidence for the collapse of Spanish savings banks

The dynamic effects of non-performing loans on banks’ cost of capital and lending supply in the Eurozone

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