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

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.

Bank loan loss provisioning during election years: cross-country evidence

“…In Poland, Borsuk (2019) conducted a set of stress test scenarios to determine how different economic scenarios would affect the level of LLPs and other financial ratios. Borsuk (2019) finds that economic growth, the labor market and market interest rates have a significant influence on the loan loss provision ratio of banks in Poland. In Uruguay, Gambetta et al (2016) focused on the regulatory reporting of LLPs to bank supervisors.…”