Title: The role of macroeconomic determinants in credit risk measurement in transition country: Estonian example
Author: Grigori Fainstein, Igor Novikov
Tallinn University of Technology, Tallinn School of Economics and Business Administration, Ehitajate tee 5, 19086 Tallinn, Estonia.
Tallinn University of Technology, Tallinn School of Economics and Business Administration, Ehitajate tee 5, 19086 Tallinn, Estonia
Abstract: Purpose – The purpose of this article is to investigate empirically the influence of macroeconomic and real estate market variables on the level of non-performing loans. A secondary goal is to analyse the effect of constant loan portfolio growth on the level of non-performing loans. Design/methodology/approach – The Vector Error Correction Model is applied. Findings – The research indicates that the most significant reason for the growth of non-performing loans was caused by the changes in the real GDP. The increasing influence of rapid loan portfolio growth proves the assumption that banks' credit risk management policies underestimated the changes in the macroeconomic variables during the analysed periods. Rapid growth of the real estate market played an important role, but it was not as crucial as it has been previously assumed. Practical implications – Developed an innovative approach of credit risk analysis that can be used for forecasting banks' financing activity. Originality/value – There has been developed and tested empirically an innovative approach of credit risk analysis based on the combined influence of different credit risk determinants.
Keywords: non-performing loans; banking system; credit risk determinants; vector error correction model; VECM; Estonia; macroeconomics; real estate; market variables; constant loan portfolios; GDP; credit risk management; risk assessment; transition economies.
Int. J. of Transitions and Innovation Systems, 2011 Vol.1, No.2, pp.117 - 137
Available online: 11 Apr 2011