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The Macroeconomics of the Arab States of the Gulf$
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Raphael Espinoza, Ghada Fayad, and Ananthakrishnan Prasad

Print publication date: 2013

Print ISBN-13: 9780199683796

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199683796.001.0001

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Nonperforming Loans and Financial Stability

Nonperforming Loans and Financial Stability

Chapter:
(p.136) 7 Nonperforming Loans and Financial Stability
Source:
The Macroeconomics of the Arab States of the Gulf
Author(s):

Raphael Espinoza

Ghada Fayad

Ananthakrishnan Prasad

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199683796.003.0007

According to a dynamic panel estimated over 1995–2008 on around 80 banks in the GCC region, the NPL ratio worsens as economic growth becomes lower and interest rates and risk aversion increase. Our model implies that the cumulative effect of macroeconomic shocks over a three year horizon is indeed large. Firm-specific factors related to risk-taking and efficiency are also related to future NPLs. The chapter finally investigates the feedback effect of increasing NPLs on growth using a VAR model. According to the panel VAR, there could be a strong, albeit short-lived feedback effect from losses in banks’ balance sheets on economic activity, with a semi-elasticity of around 0.4.

Keywords:   gulf cooperation council, NPLs, banking sector, macro-financial linkages, stress-testing

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