Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects

By Raphael A Espinoza, Ananthakrishnan Prasad

October 1, 2010

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Raphael A Espinoza, and Ananthakrishnan Prasad. Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects, (USA: International Monetary Fund, 2010) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

According to a dynamic panel estimated over 1995 - 2008 on around 80 banks in the GCC region, the NPL ratio worsens as economic growth becomes lower and interest rates and risk aversion increase. Our model implies that the cumulative effect of macroeconomic shocks over a three year horizon is indeed large. Firm-specific factors related to risk-taking and efficiency are also related to future NPLs. The paper finally investigates the feedback effect of increasing NPLs on growth using a VAR model. According to the panel VAR, there could be a strong, albeit short-lived feedback effect from losses in banks’ balance sheets on economic activity, with a semi-elasticity of around 0.4.

Subject: Banking, Commercial banks, Credit, Credit risk, Financial institutions, Financial regulation and supervision, Loans, Money, Nonperforming loans

Keywords: Balance sheet constraint, Bank, Bank Muscat SAOG, Banking system, Banks in the Gulf Cooperative Council, Commercial banks, Credit, Credit risk, Feedback effect, GCC countries data, GCC country, GCC economy, GCC region, Global, Gulf Cooperation Council, Interest rate, Loan, Loans, Macro-financial linkages, Nonperforming loans, NPL ratio, NPLs, Stress-testing, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/224
Stock No:

WPIEA2010224
ISBN:

9781455208890
ISSN:

1018-5941

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