Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI

In this paper, we analyze the link between the macroeconomic developments and the banking credit risk in a particular group of countries - Greece, Ireland, Portugal, Spain and Italy (GIPSI) - recently affected by unfavourable economic and financial conditions.Employing dynamic panel data approaches to these five countries over the period 1997q1-2011q3, we conclude that the banking credit risk is significantly affected by the macroeconomic environment: the credit risk increases when GDP growth and the share and housing price indices decrease and rises when the unemployment rate, interest rate, and credit growth increase; it is also positively affected by an appreciation of the real exchange rate; moreover, we observe a substantial increase in the credit risk during the recent financial crisis period. Several robustness tests with different estimators have also confirmed these results.The findings of this paper indicate that all policy measures that can be implemented to promote growth, employment, productivity and competitiveness and to reduce external and public debt in these countries are fundamental to stabilize their economies.

► Link between the macroeconomic developments and the banking credit risk ► Analysis for Greece, Ireland, Portugal, Spain and Italy from 1997 to 2011 ► Dynamic panel data approaches are employed. ► Results show that banking risk is affected by the macroeconomic environment. ► GDP growth, unemployment, interest rates and credit growth play the main role.