A VAR Analysis of the Effects of Macroeconomic Shocks on banking sector loan quality in Romania

Abstract

Credit risk assessment represents an important component of macro prudential analysis, with the aggregate nonperforming loan (NPL) ratio being considered as a proxy for the economy-wide probability of default of the banking sector’s overall loan exposure. The aim of this paper is to analyze the macroeconomic factors and their impact on the percentage of non-performing loans in commercial banks of Romania. The vector autoregressive model was estimated on quarterly data from period 2003-2015. Our empirical analysis confirms that, economic growth is negatively related to non-performing loans. On the other hand, unemployment and credit cycle positive influence the evolution of nonperforming loans in Romania.