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Working papers
ESM

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"  

AuthorsAlessandra DoniniGiulia FusiMattia 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.

Non-technical summary


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

 

Source: European Stability Mechanism | Working Paper Series | Volume 2025 | No. 69 | February 2025 | 31 Pages
 

Copyright © European Stability Mechanism, 2025 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.