Business performance and sector's dispersion of credit risk in Serbia

Abstract

Credit risk represents a threat not only to financial stability, but also to the slow recovery from the Great Recession in most countries of the world, and especially in Serbia. Previous studies of this problem are usually focused on banking sector, seeking solutions in the area of credit risk management, new prudential measures, more effective monitoring, high Capital Adequacy and multiplied collateral. In this paper we made a step forward from the standard framework, analyzing the correlational and causal relationship of credit risk and business performance of private enterprises, the dominant debtor of domestic banks. We particularly investigate the sectoral dispersion of credit risk, which reflects the business performance and the resistance of each sector to the impacts of the recession. We evaluated the business performance of sectors with the highest share in non-performing loans (NPL) and the highest credit risk indicator (NPL ratio). Shifting the focus of research to relationship between corporate sector and banking sector, allows us to shed light on the fundamental causes of the increasing credit risk. As a result, a real range of the system of credit risk management, that was standardized by pre-crisis Basel II document, and now by the new Basel III Capital Accord, can be evaluated. Finally, we explained the relationship between credit and systemic risk, that shows what kind of danger a high credit risk constitutes in the economy of any country.