Analyzing Macroeconomic Variables and Stress Testing Effects on Credit Risk: Comparative Analysis of European Banking Systems

Salma Gallas (), Houssam Bouzgarrou () and Montassar Zayati ()
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Salma Gallas: IHEC Sousse, University of Sousse, Tunisia
Houssam Bouzgarrou: Higher Institute of Finance and Taxation, University of Sousse, Tunisia
Montassar Zayati: ISFF of Sousse and LaREMFiQ, University of Sousse, Sousse, Tunisia

Journal of Central Banking Theory and Practice, 2025, vol. 14, issue 2, 121-149

Abstract: This study provides a comparative analysis of European banking systems, focusing on how macroeconomic factors influence non-performing loans (NPLs) to evaluate bank credit risk from 2008 to 2022. Using the Cross-Sectional Autoregressive Distributed Lag (CS-ARDL) model, the research examines both short-term and long-term relationships between NPLs and key macroeconomic indicators, such as inflation, GDP growth, public debt, and unemployment rates. Additionally, macroeconomic stress tests are incorporated to assess the impact of economic shocks on default risk and analyze the sensitivity of NPL rates to changes in these macroeconomic determinants. The empirical results indicate that inflation and unemployment significantly affect NPLs across European banking institutions. Furthermore, the analysis of stress scenarios reveals that European banks, particularly those in Italy and Germany, have been notably impacted by both the financial crisis and the recent pandemic crisis of 2020. Policymakers and governments must take necessary precautions to mitigate the consequences of adverse scenarios and support banks in managing credit risk to maintain financial market stability.

Keywords: NPLs; CS-ARDL model; macroeconomic factors; credit risk; macroeconomic credit stress test; European banking systems. (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 G32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:cbk:journl:v:14:y:2025:i:2:p:121-149

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