Abstract
This paper assesses the effect of the recent 2014–2015 oil price slump on the financial stability in the Gulf Cooperation Council (GCC) region. The first objective of this paper is to assess how oil price shock propagates within the macroeconomy and how the macro shocks transmit to GCC banks’ balance sheets. This part of the paper implements a System Generalized Method of Moments (GMM) and a Panel Fixed Effect Model to estimate the response of nonperforming loans (NPLs) to its macroeconomic determinants. The second objective of this paper is to assess any negative feedback effects between the GCC banking systems and the economy. The paper, therefore, implements a Panel VAR model to explore the macro-financial linkages between GCC banking systems and the real economy. The results indicate that oil price, non-oil GDP, interest rate, stock prices, and housing prices are major determinants of NPLs across GCC banks and the overall financial stability in the region. Credit risk shock tends to propagate disturbances to non-oil GDP, credit growth, and stock prices across GCC economies. A higher level of NPLs restricts banks’ credit growth and can dampen economic growth in these economies. The results support the notion that disturbances in banking systems lead to unwanted economic consequences for the real sector.
Highlights
The recent 2014–2015 oil price slump has negatively affected the macroeconomic performance of oil exporting economies and their banking systems
This paper considers oil price, non-oil GDP, lending interest rate, stock price, housing prices, and credit growth to examine the credit risk implications of the recent oil price slump on Gulf Cooperation Council (GCC) banking systems
As a macroeconomic determinant of nonperforming loans (NPLs) in the GCC region, a decline in oil price contributes to a higher level of NPLs as well as the declines in Non-oil GDP, and stock prices
Summary
The recent 2014–2015 oil price slump has negatively affected the macroeconomic performance of oil exporting economies and their banking systems. While Espinoza and Prasad [1] study the macroeconomic determinants of nonperforming loans across GCC banks, they do not test the role of oil price in their model arguing that oil price does not vary across GCC countries and brings less country specific information about these economies. The first objective of this paper is to assess the oil price shock transmission channels, along with other macroeconomic shocks, to GCC banks’ balance sheets. This part of the paper implements a System Generalized Method of Moments (GMM) model of Blundell and Bond [5] and a Panel Fixed Effect Model to estimate the response of nonperforming loans (NPLs) to its macroeconomic determinants. Declines in oil prices increase NPLs, as do the declines in non-oil GDP and stock
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
