Credit Risk Determinants in the Vulnerable Economies of Europe: Evidence from the Italian Banking System

Esida Gila-Gourgoura and Eftychia Nikolaidou
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Esida Gila-Gourgoura: School of Economics, University of Cape Town

No 2018-08, School of Economics Macroeconomic Discussion Paper Series from School of Economics, University of Cape Town

Abstract: This study uses the Autoregressive Distributed Lag (ARDL) approach to cointegration to identify the factors affecting credit risk in the Italian banking system over the period 1997Q4–2017Q1. The ratio of new bad loans to the outstanding amount of performing loans in the previous period is the selected proxy of credit risk whereas a wide range of explanatory variables are included in the study, taking stock from the related literature and the specific features of Italy. Compared to the previous studies, a wider timeframe is investigated, which captures the booming period, the global financial crisis and the ongoing Eurozone sovereign debt crisis. The findings suggest that macroeconomic cyclical, bank-specific, and financial market variables affect the flow of new bad loans in the Italian banking system. The high significance of the sovereign debt crisis risk proxy signals the important link between banking and sovereign debt crisis both in the short and in the long term and therefore rings a bell to fiscal and monetary authorities in Italy and the Euro area.

Date: 2018
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Related works:
Working Paper: CREDIT RISK DETERMINANTS IN THE VULNERABLE ECONOMIES OF EUROPE: EVIDENCE FROM THE ITALIAN BANKING SYSTEM (2018)
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