This paper examines the transmission of financial stress shocks between the USA and the euro area for recessionary and non-recessionary regimes in the shock-recipient economy. The investigated period is 1999M1–2017M11, which includes several episodes of recessionary and non-recessionary regimes, endogenously determined by the model, as well as several financial stress episodes. After testing for non-linearity, we employ a five-variable Bayesian threshold vector autoregression model using internationally compatible data for financial stress indices. Our results show significant non-linearities in the financial stress-business cycle interactions for the euro area. In comparison to the non-recessionary regime, the US financial stress shocks are more detrimental to the stability of the European financial system, output growth, and inflation in recessions. US financial stress shocks negatively affect euro area unemployment rate, but the effect is independent of the euro area industrial production growth regime. In contrast, the stability of the US financial system is not susceptible to the euro area’s financial stress shocks. However, due to trade ties, the financial stress in the euro area does lead to output contraction, while not affecting inflation and unemployment in the US. We also found that US industrial production growth and unemployment rate are susceptible to domestic financial stress shocks, more in the recessionary than non-recessionary episodes of the US economy. The results suggest a need for a careful domestic and foreign financial stress monitoring and coordination of monetary authorities. While this may profit both economic areas, this is relevant more for the European Central Bank than its US counterpart.

Ab stract:An ex po sure to mac ro eco nomic risk fac tors across banks is a source of sys temic risk that in flu ences the bank ing sec tor per for mance. In this pa per, we pres ent some ev i dence on mac ro eco nomic vari ables af fect ing the non-per form ing loans (NPL) ra tio in the Czech Re pub lic, Slovakia and Slovenia. The GDP growth might have im proved bor row ers' abil ity to serve their bank loans in Slovenia, mean while the ac cel er at ing NPL ra tio dy nam ics has failed to sup port the hy poth e sis that the GDP growth fos ters an im prove ment in the NPL ra tio in the case of Slovakia. Mean while de cel er a tion in the NPL ra tio on ex port im pulses has sup ported a procyclical the ory in the Czech Re pub lic, Slovakia and Slovenia. The re sponse of non-per form ing loans to in fla tion sup ports the hy poth e sis about the low er ing in fla tion that de cel er ates the NPL ra tio. Sav ings have ac cel er ated the NPL ra tio in the case of Slovakia and Slovenia. The bank ing sec tor per for mance is pos si bly re flect ing a fa vour able as sess ment of the eco nomic growth and an in creas ing in debt ed ness of pri vate sec tor could be come causes of concern if the macroeconomic environment should develop less favourably.

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