Macroeconomic determinants of credit risks: evidence from high-income countries

Abstract

Purpose The purpose of this paper is to empirically assess the significant indicators of macroeconomic environment that influence credit risk in high-income countries. Design/methodology/approach The study employs the system generalized method of moments estimator to avoid the dynamic panel bias and endogeneity issues. Different indices of economic growth are used in each model in order to find the most significant proxy of the economic cycle that influences problem loans. The analysis is carried out using a sample of 49 developed countries covering a 16-year period (2000–2015). Findings The overall empirical results highlight that the development of industrial sectors and exports are the main drivers of loan performance in high-income countries. The findings specifically recommend adopting an expansionary fiscal policy to boost per capita income and potential productivity for the safety of the banking system. Practical implications The findings have direct practical applicability for stabilizing the financial system. The study recommends the government to increase the productivity of export-oriented industries in order to boost employment and increase the payment obligations of individuals and business firms. More importantly, it highlights the essentiality of perfect economic policy to control default risks. Originality/value To the best of the authors’ knowledge, this is the first empirical study that compares the relative effect of three alternative proxies of the economic cycle on credit risk and identifies the most significant proxy. The current study also empirically shows that industrial development could be one of the crucial factors to improve financial health in developed countries.

Financial Innovation, Sustainable Economic Growth, and Credit Risk: A Case of the ASEAN Banking Sector

“…However, the results of this study do not support either of these hypotheses and are statistically insignificant. These results are consistent with the past studies such as the findings of Koju et al (2019) Lee et al (2019 and Tanasković and Jandrić (2015). Regarding limitation of current research, it was limited to four ASEAN countries due to data availability issues.…”

The impact of air pollution on the cost of debt financing: Evidence from the bond market

“…Thus their credit risks are expected to be moderated. Koju et al (2019) highlight the importance of economic policies (e.g., fiscal policy, monetary policy, industrial policy, and trade openness policy) in improving credit quality and reducing loan default rates. Fu et al (2021) examine the determinants of credit default swap (CDS) spreads in the United States, the United Kingdom, and Japan between 2005 and 2012 and elucidate that credit default is determined by firm performance and macroeconomic conditions.…”

Determinants of banks’ risk-taking behavior, stability and profitability: evidence from GCC countries

“…Such studies have explored the impact of bank-specific factors such as risk, market power, size and capitalization on bank performance. More recently, research has focused on the impact of macroeconomic factors on bank performance (Koju et al, 2019;Nieto, 2019;Serrano, 2019;Moudud-Ul-Huq, 2019;Arham et al, 2020;Rashid and Khalid, 2020;Nugroho et al, 2020;Elmawazini et al, 2020;Anwar et al,2020). Moreover, to date, empirical research has concentrated on a specific country, mainly the banking system of the USA (Berger, 1995;Teixeira et al, 2020) and the banking systems in other developed countries such as the UK (Valverde and Fern andez, 2007), Finland (Huhtilainen, 2020) and Italy (Barra and Zotti, 2019).…”