Abstract
The objective of the paper is to investigate and compare risk patterns in retail and corporate segments and assess the potential impact of macroeconomic shocks on loan quality. Banks’ monthly financial statements data for the period 2004 – 2012 are used. Firstly, we develop an indicator to measure institution’s credit risk that reflects variance and average value of NPL corrected for loan loss reserves. It is used to compare the risk-return patterns of largest state-owned banks, and under our framework we identify how the strategies of various banks differ in retail and corporate loans, identifying ‘safest’ and ‘riskiest’ institutions. Secondly, loan growth and credit risk sensitivity to macroeconomic shocks is analyzed using vector auto-regression. Macroeconomic shocks do not significantly increase NPL growth in the corporate segment. However, inflation and investment growth have a considerable impact on NPL growth in the retail segment (which is however almost three times less than the corporate). Based on these findings we conclude that there is no reason to expect rampant rise in corporate loan defaults in response to sudden changes in macroeconomic environment of Russia, though further growth of corporate loan segment increases credit risk, while the opposite is true about the retail sector.
Highlights
Global financial turmoil emphasizes the importance of efficient monitoring of banking system stability and stress testing is one of the most widely used tools in this area, which enables us to estimate the impact of macroeconomic shocks on financial sector
Before we begin the analysis of risks, vulnerability in each sector we briefly look at market size dynamics in corporate and retail segments of Russian credit market
This leads to almost 8-percentage point‟s increase in NPL growth for the first month on impact, compensated by almost the same 8 percentage points drop in the second month after shock; for the six months the effect fades and NPL growth returns to pre-shock level.This leads us to the conclusion that corporate loan segment is rather prone to macro shocks but to volume of loans shock as the effect of a shock appears to be very short termed (2 months) and has no serious consequences on quality of loans measured by NPL growth
Summary
Global financial turmoil emphasizes the importance of efficient monitoring of banking system stability and stress testing is one of the most widely used tools in this area, which enables us to estimate the impact of macroeconomic shocks on financial sector. The recent economic crisis has clearly shown that financial stability can be significantly affected by macroeconomic environment in addition to bank-specific factors; the importance of efficient estimates of banking system vulnerability to real shocks is increasingly important. In case of Russia IMF (2011a) pointed that the methodology of Russian Central Bank (RCB) in conducting stress-tests can be improved in order to implement more involved estimation techniques and to comply with Basel II recommendations on assessing credit risk. This study aims to fill the gap and provide a comprehensive set of up-to-date though easy-to-use techniques that can be used for assessing potential risks allowing the distinction between corporate and retail segments of Russian credit market
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