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Forecasting the Net Interest Margin and Loan Loss Provision Ratio of Banks in Various Economic Scenarios: Evidence from Poland

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  • Marcin Borsuk

    (Kazimierz Wielki University)

Abstract

The aim of stress-testing is to test the resilience of the banking sector to negative developments on the financial markets and in the real economy. One of the key issues in stress-testing is the translation of various scenarios into bank-level risk parameters and the determination of their impact on banks' profitability or loss-bearing capacity. This paper has two objectives. The first is to identify key macroeconomic determinants of the loan loss provision ratio and net interest margin. The second is to show how satellite models can be applied in stress-testing exercises to determine the impact of macroeconomic outcomes on banks. We contribute to the empirical literature by defining macroeconomic determinants for credit risk on the basis of three different credit portfolios (consumer, mortgage, and corporate) for banks operating in Poland. Our estimation results suggest that economic growth, the labour market, and market interest rates have a significant influence on the net interest margin and loan loss provision ratio.

Suggested Citation

  • Marcin Borsuk, 2019. "Forecasting the Net Interest Margin and Loan Loss Provision Ratio of Banks in Various Economic Scenarios: Evidence from Poland," Russian Journal of Money and Finance, Bank of Russia, vol. 78(1), pages 89-106, March.
    • Handle: RePEc:bkr:journl:v:78:y:2019:i:1:p:89-106
    DOI: 10.31477/rjmf.201901.89
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    2. Ozili, Peterson K, 2019. "Bank loan loss provisioning during election years in Nigeria," MPRA Paper 96704, University Library of Munich, Germany.

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    More about this item

    Keywords

    net interest margin; loan loss provision ratio; stress-testing; financial stability; panel estimation;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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