Cash Flow at Risk Assessment for the Banking Sector of Georgia

Tamar Mdivnishvili (), Shalva Mkhatrishvili and Davit Tutberidze ()
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Tamar Mdivnishvili: Macroeconomic Research Division, National Bank of Georgia
Davit Tutberidze: Macroeconomic Research Division, National Bank of Georgia

No 03/2020, NBG Working Papers from National Bank of Georgia

Abstract: The aim of our study is to estimate the distribution of the profitability of the Georgian banking sector, in order to determine liquidity risk, for which we use Cash Flow at Risk (CFaR). In our estimation, we took into account possible nonlinear impact of monetary policy on banks' profit, which allows us also to estimate the neutral interest rate. According to our results, the relationship between bank profits on the one hand and short- and long-term interest rates on another is nonlinear indeed. In addition to median estimates, we also use quantile regression, which allows us to estimate tail risks. According to the results in a "normal" (median) situation, when interest rates are below neutral rate, decreasing policy rate reduces banks' profits, while if banks suffer from low liquidity (on a lower percentile), reduction of policy rate increases banks' profits. According to the quantile regression output, the relationship between bank profitability and yield curve is asymmetric. The results also show the dependence of bank liquidity risk on other macro variables. Estimates are made for the entire banking sector as well as for the two largest banks in Georgia.

Keywords: Quantile regression; Forecasting; Monetary policy; Bank profitability; CFaR (search for similar items in EconPapers)
JEL-codes: C21 C53 E52 G21 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2020-07
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Persistent link: https://EconPapers.repec.org/RePEc:aez:wpaper:2020-03

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