Research Discussion Papers, Bank of Finland
No 13/2005:
Banking fragility and distress: An econometric study of macroeconomic determinants
Jarmo Pesola ()
Abstract: The macroeconomic determinants of banking sector
distresses in the Nordic countries, Belgium, Ger-many, Greece, Spain and
the UK are analysed using an econometric model estimated on panel data from
partly the early 1980s to 2002. The dependent variable is the ratio of
banks’ loan losses to lending. In ad-dition to the lagged dependent
variable, the explanatory variables include a surprise change in incomes
and real interest rates, both variables as a separate cross-product term
with lagged aggregate indebtedness. The underlying macroeconomic account
that this paper puts forward is that loan losses are basically gen-erated
by strong adverse aggregate shocks under high exposure of banks to such
shocks. The underlying innovations to income and real interest rates are
constructed using published macro-economic forecast for these variables.
According to the results, high customer indebtedness combined with adverse
macroeco-nomic surprise shocks to income and real interest rates
contributed to the distress in banking sector. Loan losses also display
strong autoregressive behaviour which might indicate a feedback effect from
loan losses back to macroeconomic level in deep recessions. The results can
be used in macro stress-testing the banking sector.
Keywords: financial fragility; shock; loan loss; banking crisis; (follow links to similar papers)
JEL-Codes: E44; G21; (follow links to similar papers)
100 pages, July 11, 2005
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