Macroeconomic Modelling of Credit Risk for Banks

AbstractThis study aims to explore the relations between bank credit risks and macroeconomic factors. We employ a set of variables including the inflation rate, interest rate, the ISE-100 index, foreign exchange rate, growth rate, M2 money supply, unemployment rate, and the credit risk represented by the ratio of non-performing loans to total loans (NPL) for Turkey during the January 1998 and July 2012 period. The general-to-specific modelling methodology developed by Hendry (1980) was employed to analyze short-run dynamic intervariable relationships, while Engle- Granger (1987) and Gregory-Hansen (1996) methodologies were used to analyze long-run relationships. In both methods, growth rate and ISE index are the variables that reduce banks’ credit risk in the long run, while money supply, foreign exchange rate, unemployment rate, inflation rate, and interest rate are the variables that increase banks’ credit risks. The specific model demonstrated that the previous period's credit risk has a significant impact on the current period's credit risk