Joint effect of financial fragility and macroeconomic shocks on bank loan losses: Evidence from Europe

A reduced-form model including nonlinearities is estimated from pooled data from nine European countries during 1982-2004 to show the effects of macroeconomic shocks and financial fragility on bank loan losses. The main ingredients of the model are unanticipated-output and interest-rate shocks estimated from published macroeconomic and naïve forecasts. The model fits the data well, capturing the extremely high levels of loan losses witnessed in different financial crises.