Title: Asset-Quality-at-Risk
Summary: The paper introduces a novel approach to predicting future asset quality deterioration in euro area banks: "asset-quality-at-risk"
Authors: Alessandra Donini, Giulia Fusi, Mattia Picarelli (all ESM)
Abstract: Non-performing loans (NPLs) have been at the core of financial sector policy discussions since the Great Financial Crisis. In this study, we first investigate the drivers of asset quality deterioration for a sample of euro area banks and document the existing non-linear relationships between NPLs and their macro-financial determinants. By employing dynamic fixed effects panel quantile regression, we find that different macroeconomic and bank-specific variables have different explanatory power at different quantiles of the distribution of NPLs. In the second part of the paper, we leverage on the Growth-at-Risk framework to link current macro-financial conditions to the probability distribution of future NPL ratios and construct a new measure, “asset-quality-at-risk”, which could serve as a forward-looking indicator of possible future asset quality deterioration in banks’ balance sheets.
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
Keywords: Banks, non-performing loans, quantile regressions, financial stability
JEL codes: C21, C23, G21, G28