Research Discussion Papers, Bank of Finland
No 15/2007:
Financial fragility, macroeconomic shocks and banks’ loan losses: evidence from Europe
Jarmo Pesola ()
Abstract: This paper tests the hypothesis that the more fragile a
banking system is, the more likely it is to experience problems when an
unexpected shock hits. The empirical framework where this test is conducted
is a reduced form model, where macroeconomic factors explain banks’ loan
losses. The dependent variable is the ratio of net loan losses to lending
in a panel comprising the banking sectors of nine sample countries. An
econometric model is estimated on pooled annual data mostly covering the
period from the early 1980s to 2002. There are three separate explanatory
terms. Two of these include a surprise change both in incomes and real
interest rates. Both form a separate cross-product term with lagged
aggregate indebtedness. The lagged dependent variable is the third
explanatory term possibly capturing the feedback effect from loan losses
back to the real economy. The underlying macroeconomic account that this
paper puts forward is that loan losses seem basically to be generated by
strong adverse aggregate shocks under high exposure of banks to such
shocks. The model has been used in connection with stress testing in the
Bank of Finland.
Keywords: financial fragility; unexpected macroeconomic shock; loan loss; stress test; (follow links to similar papers)
JEL-Codes: E44; G21; (follow links to similar papers)
38 pages, October 9, 2007
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
0715netti.pdf 
Download Statistics
- This paper is published as:
-
Pesola, Jarmo, (2011), 'Joint effect of financial fragility and macroeconomic shocks on bank loan losses: Evidence from Europe', Journal of Banking & Finance, Vol. Volume 35, November, No. Issue 11, pages 3134-3144
Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
