Analysis of Tail Dependence between Sovereign Debt Distress and Bank Non-Performing Loans

Li Liu, Yu-Min Liu, Jong-Min Kim, Rui Zhong () and Guang-Qian Ren
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Li Liu: Business School, Zhengzhou University, Zhengzhou 450001, China
Yu-Min Liu: Business School, Zhengzhou University, Zhengzhou 450001, China
Jong-Min Kim: Division of Science and Mathematics, University of Minnesota-Morris, Morris, MN 56267, USA
Guang-Qian Ren: Business School, Zhengzhou University, Zhengzhou 450001, China

Sustainability, 2020, vol. 12, issue 2, 1-20

Abstract: We investigate the tail dependence between sovereign debt distress and bank non-performing loans (NPLs) using a large sample of developed and emerging countries in recent decades. Considering the feedback loop of sovereign debt and bank loan distress, we use three copula models to analyze the asymmetry of tail dependence structure between sovereign debt exposure and bank NPLs. We use the Gaussian copula marginal regression to control the concurrent impact of other macroeconomic variables. We provide evidence that sovereign debt indicates an important determinant of NPLs. We also find that there is tail dependence between sovereign debt distress and bank NPLs, whereas the tail dependence coefficients vary across countries. Our findings shed light on the influence of fiscal distress on bank loan distress and provide immediate implications for the design of macro prudential and financial policy.

Keywords: non-performing loans; sovereign debt distress; tail dependence; gaussian copula regression (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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