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Volume 11 (2022): Issue 3 (September 2022)

Volume 11 (2022): Issue 2 (May 2022)

Volume 11 (2022): Issue 1 (January 2022)

Volume 10 (2021): Issue 3 (September 2021)

Volume 10 (2021): Issue 2 (May 2021)

Volume 10 (2021): Issue 1 (January 2021)

Volume 9 (2020): Issue 3 (September 2020)

Volume 9 (2020): Issue 2 (May 2020)

Volume 9 (2020): Issue 1 (January 2020)

Volume 9 (2020): Issue s1 (July 2020)

Volume 8 (2019): Issue 3 (September 2019)

Volume 8 (2019): Issue 2 (May 2019)

Volume 8 (2019): Issue 1 (January 2019)

Volume 7 (2018): Issue 3 (September 2018)

Volume 7 (2018): Issue 2 (May 2018)

Volume 7 (2018): Issue 1 (January 2018)

Volume 6 (2017): Issue 3 (September 2017)

Volume 6 (2017): Issue 2 (May 2017)

Volume 6 (2017): Issue 1 (January 2017)

Volume 5 (2016): Issue 3 (September 2016)

Volume 5 (2016): Issue 2 (May 2016)

Volume 5 (2016): Issue 1 (January 2016)

Volume 4 (2015): Issue 3 (September 2015)

Volume 4 (2015): Issue 2 (May 2015)

Volume 4 (2015): Issue 1 (January 2015)

Volume 3 (2014): Issue 3 (September 2014)

Volume 3 (2014): Issue 2 (May 2014)

Volume 3 (2014): Issue 1 (January 2014)

Journal Details
Format
Journal
eISSN
2336-9205
First Published
11 Mar 2014
Publication timeframe
3 times per year
Languages
English

Search

Volume 9 (2020): Issue 2 (May 2020)

Journal Details
Format
Journal
eISSN
2336-9205
First Published
11 Mar 2014
Publication timeframe
3 times per year
Languages
English

Search

10 Articles
Open Access

Effects of Macroeconomic Environment on Non-Performing Loans and Financial Stability: Case of Bosnia and Herzegovina

Published Online: 02 Jun 2020
Page range: 5 - 17

Abstract

Abstract

This paper analyses the impact of macroeconomic conditions on non-performing loans and financial stability in Bosnia and Herzegovina`s banking sector. The aim of this paper is to identify the effects of macroeconomic conditions on non-performing loans and the banking sector`s financial stability. To that end, data for the period 2006-2017 have been used. In order to detect the correlations between analysed variables, we performed the correlation analysis through Pearson coefficient of correlation. Results have confirmed the assumption about correlation between macroeconomic conditions, non-performing loans, and financial stability. Further, regression analysis was applied on data divided into two models: the impact of macroeconomic conditions on non-performing loans and the impact of macroeconomic conditions on the banking sector`s financial stability. Those two models point to the significance of macroeconomic environment for non-performing loans control and financial stability maintenance. Namely, the results have shown that improvement in macroeconomic conditions causes improvement in credit quality. Also, it was disclosed that better macroeconomic conditions ensure better conditions for maintenance of the banking sector`s financial stability.

Keywords

  • Non-performing loans
  • Bank
  • Financial stability
  • Macroeconomic
  • Impact

JEL Classification

  • G00
  • G21
Open Access

Interest Rate Policy and Exchange Rates Volatility Lessons from Indonesia

Published Online: 02 Jun 2020
Page range: 19 - 42

Abstract

Abstract

Whether or not inflation targeting adoption leads to increased volatility of exchange rates is controversial. The volatility increases with inflation targeting as a result of the flexible exchange rate regime. Others argue that inflation targeting delivers the best outcomes in terms of lower exchange rate volatility. The purpose of this paper is to investigate whether interest rate policy in inflation targeting frameworks – that is subjected to control inflation rate – may reduce the volatility of exchange rates. To test the hypothesis, we use monthly data in the case of Indonesia over the period 2005(7)-2016(7). Several control variables are introduced in the regressions. The result of the autoregressive distributed lag model proves the interest rate policy and foreign exchange intervention fail to reduce the exchange rates volatility. It seems inflation targeting in Indonesia puts too much emphasis on stabilizing the domestic currency thus leading to benign neglect of stabilizing its external value, ultimately resulting in increased exchange rate volatility. These findings suggest that central bank credibility plays an important role in conducting inflation targeting policy which operates primarily through a signalling effect.

Keywords

  • Inflation Targeting
  • Interest Rate Policy
  • International Reserve
  • Exchange Rates Volatility
  • ARDL

JEL Classification

  • E42
  • E52
  • E58
  • F31
Open Access

Fintech and Financial Stability Potential Influence of FinTech on Financial Stability, Risks and Benefits

Published Online: 02 Jun 2020
Page range: 43 - 66

Abstract

Abstract

Since the last global financial crisis supervisory mechanisms and regulations have become more stringent which have significantly improved resilience of banks therefore positively affecting financial stability. Apart from traditional financial institutions which have been supervised according to strict regulations and standards technological development in financial services commonly called FinTech have introduced new trends providing fast peer to peer lending which directly matches lenders and borrowers thus putting more pressure to policymakers and supervisors.

This paper presents potential implications of FinTech developments to financial stability, while explaining FinTech influence to market structure as well as benefits and risks of technologically driven financial innovations to financial stability.

The paper stresses out an importance of international cooperation of regulators in order to preserve financial stability in the recent world of technological changes and innovations. FinTech has changed consumers’ expectations and preferences while increasing the number of users expecting fast and easily accessible services available on mobile phones and other electronic devices. The paper shows that new technology provides the space for expanding financial services but it also poses additional risks to financial system in terms of microfinancial and macrofinancial risks.

Keywords

  • financial stability
  • FinTech
  • technological developments
  • financial innovations
  • market structure

JEL Classification

  • F61
  • F62
  • E58
  • E61
  • E62
  • G18
  • G15
  • F42
  • F58
Open Access

Exchange Rate Targeting Versus Inflation Targeting: Empirical Analysis of the Impact on Employment and Economic Growth

Published Online: 02 Jun 2020
Page range: 67 - 85

Abstract

Abstract

This paper analyses the effects of two alternative monetary strategies (exchange rate targeting and inflation targeting) on economic growth and employment. On the panel of 18 countries for the period from 1996 to 2013, I tested the hypothesis that countries in exchange rate targeting have a higher rate of GDP growth and lower inflation rate. In order to test the impact of exchange rate policy on economic growth and prices, I applied dynamic panel two stepwise method of least squares (2SLS method) and they were evaluated by two independent regression equation. In order to allow the comparison of results related to exchange rate targeting, the effects of the introduction of inflation targeting in the unemployment rate were also estimated using the panel method two stepwise least squares (2SLS method). Results of empirical studies show that countries with inflation targeting have a lower rate of economic growth and higher unemployment.

Keywords

  • exchange rate targeting
  • inflation targeting
  • monetary strategy
  • economic growth
  • employment

JEL Classification

  • E31
  • E42
  • E52
  • E58
  • F31
Open Access

Econophysical bourse volatility – Global Evidence

Published Online: 02 Jun 2020
Page range: 87 - 107

Abstract

Abstract

Financial Reynolds number (Re) has been proven to have the capacity to predict volatility, herd behaviour and nascent bubble in any stock market (bourse) across the geographical boundaries. This study examines forty two bourses (representing same number of countries) for the evidence of the same. This study finds specific clusters of stock markets based on embedded volatility, herd behaviour and nascent bubble. Overall the volatility distribution has been found to be Gaussian in nature. Information asymmetry hinted towards a well-discussed parameter of ‘financial literacy’ as well. More than eighty percent of indices under consideration showed traces of mild herd as well as bubble. The same indices were all found to be predictable, despite being stochastic time series. In the end, financial Reynolds number (Re) has been proved to be universal in nature, as far as volatility, herd behaviour and nascent bubble are concerned.

Keywords

  • Financial Reynolds number
  • volatility
  • Herding
  • Bubble
  • Econophysics

JEL Classification

  • G170
  • G410
  • A120
Open Access

The Cost of Using Cash and Checks in Uruguay

Published Online: 02 Jun 2020
Page range: 109 - 129

Abstract

Abstract

The incorporation of new technologies to financial activities implies challenges and opportunities to financial authorities. They are reacting to the unavoidable trend towards digitalization of financial activities with the objective of preserving stable and efficient payment and financial systems. Uruguay, for instance, has promoted the use of electronic payment instruments and tested in the real economy a central bank digital currency called e-Peso. Digitalization of payment systems would reduce transaction costs by (partially) replacing less efficient means of payment, e.g. paper-cash and checks. In this paper we find that the cost of using cash in Uruguay is approximately 0.61% of GDP. Interestingly, 98.1% of this cost is borne by the private sector: banks and retailers 77.1% and households 21.0%. The cost of using checks is equivalent to 0.04% of GDP. Overall, replacing paper-cash and checks by other (electronic) means of payment would imply a transaction cost reduction for the private sector of the equivalent of up to 0.65% of GDP.

Keywords

  • payment system
  • cost of cash
  • cost of checks
  • electronic payments

JEL Classification

  • D12
  • D23
  • D24
Open Access

Denoised Inflation: A New Measure of Core Inflation

Published Online: 02 Jun 2020
Page range: 131 - 154

Abstract

Abstract

Existing measures of core inflation ignore a part of ‘should be’ the core inflation. Exclusion based measures ‘exclude’ a part of persistent inflation inherently existing in the excluded part whereas filter based measures ‘filter-out’ the cyclical part also rather than the irregular component only. This study proposes a new idea to define and measure core inflation – noise free inflation or denoised inflation. As against considering only trend to define core inflation, this study proposes using cyclical component also to be part of core inflation. If core inflation is to be useful, for monetary policy making, as an indicator of underlying inflation, it has to include demand related component of inflation associated with current economic cycle. By using wavelet analysis approach to decompose seasonally adjusted price index into noise, cyclical component and trend, we estimate a denoised inflation series for Pakistan for the period July 1992 to June 2017. Since denoised inflation passes ‘statistical’ as well as ‘theoretical’ tests necessary for a series to be core inflation, we think it can be used as a new core inflation measure for Pakistan. This can also be estimated and tested for any country.

Keywords

  • Estimation of Cyclical Component
  • Inflation
  • Monetary Policy

JEL Classification

  • C19
  • E31
  • E52
Open Access

Weighting on Systemic Important Banking (SIB) in Indonesia: The Official Versus PCA Approaches

Published Online: 02 Jun 2020
Page range: 155 - 182

Abstract

Abstract

In determining its Domestic Systemic Important Banking (D-SIB), Indonesia implemented the Global Systemic Important Banking (G-SIB) based on three of five indicators, those being size, interconnectedness, and complexity. Both the G-SIB and the Indonesian D-SIB use an equal weight for each indicator, that is, 1/5 and 1/3 respectively. However, the weight could be modified by using the eigenvector of the Principal Component Analysis (PCA). We showed that this new weighting system was better than the official weighting system (referred to in this paper as the POJK approach) based on the Financial Services Authority (OJK) regulation No.46/POJK.03/2015.

Keywords

  • Eigenvectors
  • Indonesia
  • Principal Component Analysis
  • Systemic Important Banking
  • Weighting

JEL Classification

  • C38
  • E52
  • E58
Open Access

Web-based Financial Reporting Disclosure: Evidence from Selected Banks in the Kingdom of Saudi Arabia (KSA)

Published Online: 02 Jun 2020
Page range: 183 - 197

Abstract

Abstract

With insights drawn from legitimacy theory undergirding perceived relative factors expected to influence the level of Web-Based Financial Reporting Disclosure (WBFRD), this paper sheds light on the level of the Web-Based Financial Reporting Disclosure (WBFRD) in selected banks in the KSA in 2017. Several gauges exist for measuring the level of transparency and disclosure practices. As a result of the unique characteristics of the banking sectors operating in the KSA under the Sharia-compliant (Islamic) law, however, the researcher eschewed employing Standard & Poor’s Transparency and Disclosure checklist. Accordingly, the researcher designed a 90-item index based on metrics identified in previous studies. The selected banks in the KSA evince a high level of Web-Based Financial Reporting Disclosure (WBFRD) on the order of 76%. Regression analysis indicates a positive association between the independent variables Bank Size, Bank age, and Profitability on one side, and the dependent variable Web-Based Financial Reporting Disclosure (WBFRD) on the other side.

Keywords

  • Web-Portal
  • Web-Based Financial Reporting Disclosure
  • Banking sector
  • Legitimacy theory
  • KSA

JEL Classification

  • G20
  • G21
Open Access

Macro Stress Testing Credit Risk: Case of Madagascar Banking Sector

Published Online: 02 Jun 2020
Page range: 199 - 218

Abstract

Abstract

This study proposes to assess the vulnerability of banking sector’s credit portfolio under macroeconomic shocks and to evaluate its impact on banking system capitalization. Our method uses the Global Vector Autoregressive (GVAR) Model to generate adverse macroeconomic scenarios. The GVAR model is combining by the satellite credit risk equation to find the non-performing loan under stress conditions. The advantage of using GVAR model is that on the one hand, it captures the transmission of global, external and domestic macroeconomic shocks on banks non-performing loans. On the other hand, this model considers the nonlinear pattern between business cycle and the bank credit risk indicator during the extreme events as highlighting by the macro stress test literature. The forecast of non-performing loan is then used to obtain stress projections for capital requirement for the banking system level. This article attempts to fill the lacks concerning the stress testing works about Madagascar which study is a recent framework, whose no study on dynamic macro stress testing was treated before. The Results outline the interaction of aggregate non-performing loan with macroeconomic evolution. The horizon of capital prediction shows that banking sector reacts most to a GDP shock. Also, Madagascar banking sector is quite resilient and remains sufficiently capitalized under all macroeconomic scenarios designed with a solvency ratio higher than the minimum regulatory CAR ratio.

Keywords

  • Madagascar
  • macroeconomic stress test
  • credit risk
  • banking sector
  • GVAR

JEL Classification

  • C33
  • G32
  • E44
10 Articles
Open Access

Effects of Macroeconomic Environment on Non-Performing Loans and Financial Stability: Case of Bosnia and Herzegovina

Published Online: 02 Jun 2020
Page range: 5 - 17

Abstract

Abstract

This paper analyses the impact of macroeconomic conditions on non-performing loans and financial stability in Bosnia and Herzegovina`s banking sector. The aim of this paper is to identify the effects of macroeconomic conditions on non-performing loans and the banking sector`s financial stability. To that end, data for the period 2006-2017 have been used. In order to detect the correlations between analysed variables, we performed the correlation analysis through Pearson coefficient of correlation. Results have confirmed the assumption about correlation between macroeconomic conditions, non-performing loans, and financial stability. Further, regression analysis was applied on data divided into two models: the impact of macroeconomic conditions on non-performing loans and the impact of macroeconomic conditions on the banking sector`s financial stability. Those two models point to the significance of macroeconomic environment for non-performing loans control and financial stability maintenance. Namely, the results have shown that improvement in macroeconomic conditions causes improvement in credit quality. Also, it was disclosed that better macroeconomic conditions ensure better conditions for maintenance of the banking sector`s financial stability.

Keywords

  • Non-performing loans
  • Bank
  • Financial stability
  • Macroeconomic
  • Impact

JEL Classification

  • G00
  • G21
Open Access

Interest Rate Policy and Exchange Rates Volatility Lessons from Indonesia

Published Online: 02 Jun 2020
Page range: 19 - 42

Abstract

Abstract

Whether or not inflation targeting adoption leads to increased volatility of exchange rates is controversial. The volatility increases with inflation targeting as a result of the flexible exchange rate regime. Others argue that inflation targeting delivers the best outcomes in terms of lower exchange rate volatility. The purpose of this paper is to investigate whether interest rate policy in inflation targeting frameworks – that is subjected to control inflation rate – may reduce the volatility of exchange rates. To test the hypothesis, we use monthly data in the case of Indonesia over the period 2005(7)-2016(7). Several control variables are introduced in the regressions. The result of the autoregressive distributed lag model proves the interest rate policy and foreign exchange intervention fail to reduce the exchange rates volatility. It seems inflation targeting in Indonesia puts too much emphasis on stabilizing the domestic currency thus leading to benign neglect of stabilizing its external value, ultimately resulting in increased exchange rate volatility. These findings suggest that central bank credibility plays an important role in conducting inflation targeting policy which operates primarily through a signalling effect.

Keywords

  • Inflation Targeting
  • Interest Rate Policy
  • International Reserve
  • Exchange Rates Volatility
  • ARDL

JEL Classification

  • E42
  • E52
  • E58
  • F31
Open Access

Fintech and Financial Stability Potential Influence of FinTech on Financial Stability, Risks and Benefits

Published Online: 02 Jun 2020
Page range: 43 - 66

Abstract

Abstract

Since the last global financial crisis supervisory mechanisms and regulations have become more stringent which have significantly improved resilience of banks therefore positively affecting financial stability. Apart from traditional financial institutions which have been supervised according to strict regulations and standards technological development in financial services commonly called FinTech have introduced new trends providing fast peer to peer lending which directly matches lenders and borrowers thus putting more pressure to policymakers and supervisors.

This paper presents potential implications of FinTech developments to financial stability, while explaining FinTech influence to market structure as well as benefits and risks of technologically driven financial innovations to financial stability.

The paper stresses out an importance of international cooperation of regulators in order to preserve financial stability in the recent world of technological changes and innovations. FinTech has changed consumers’ expectations and preferences while increasing the number of users expecting fast and easily accessible services available on mobile phones and other electronic devices. The paper shows that new technology provides the space for expanding financial services but it also poses additional risks to financial system in terms of microfinancial and macrofinancial risks.

Keywords

  • financial stability
  • FinTech
  • technological developments
  • financial innovations
  • market structure

JEL Classification

  • F61
  • F62
  • E58
  • E61
  • E62
  • G18
  • G15
  • F42
  • F58
Open Access

Exchange Rate Targeting Versus Inflation Targeting: Empirical Analysis of the Impact on Employment and Economic Growth

Published Online: 02 Jun 2020
Page range: 67 - 85

Abstract

Abstract

This paper analyses the effects of two alternative monetary strategies (exchange rate targeting and inflation targeting) on economic growth and employment. On the panel of 18 countries for the period from 1996 to 2013, I tested the hypothesis that countries in exchange rate targeting have a higher rate of GDP growth and lower inflation rate. In order to test the impact of exchange rate policy on economic growth and prices, I applied dynamic panel two stepwise method of least squares (2SLS method) and they were evaluated by two independent regression equation. In order to allow the comparison of results related to exchange rate targeting, the effects of the introduction of inflation targeting in the unemployment rate were also estimated using the panel method two stepwise least squares (2SLS method). Results of empirical studies show that countries with inflation targeting have a lower rate of economic growth and higher unemployment.

Keywords

  • exchange rate targeting
  • inflation targeting
  • monetary strategy
  • economic growth
  • employment

JEL Classification

  • E31
  • E42
  • E52
  • E58
  • F31
Open Access

Econophysical bourse volatility – Global Evidence

Published Online: 02 Jun 2020
Page range: 87 - 107

Abstract

Abstract

Financial Reynolds number (Re) has been proven to have the capacity to predict volatility, herd behaviour and nascent bubble in any stock market (bourse) across the geographical boundaries. This study examines forty two bourses (representing same number of countries) for the evidence of the same. This study finds specific clusters of stock markets based on embedded volatility, herd behaviour and nascent bubble. Overall the volatility distribution has been found to be Gaussian in nature. Information asymmetry hinted towards a well-discussed parameter of ‘financial literacy’ as well. More than eighty percent of indices under consideration showed traces of mild herd as well as bubble. The same indices were all found to be predictable, despite being stochastic time series. In the end, financial Reynolds number (Re) has been proved to be universal in nature, as far as volatility, herd behaviour and nascent bubble are concerned.

Keywords

  • Financial Reynolds number
  • volatility
  • Herding
  • Bubble
  • Econophysics

JEL Classification

  • G170
  • G410
  • A120
Open Access

The Cost of Using Cash and Checks in Uruguay

Published Online: 02 Jun 2020
Page range: 109 - 129

Abstract

Abstract

The incorporation of new technologies to financial activities implies challenges and opportunities to financial authorities. They are reacting to the unavoidable trend towards digitalization of financial activities with the objective of preserving stable and efficient payment and financial systems. Uruguay, for instance, has promoted the use of electronic payment instruments and tested in the real economy a central bank digital currency called e-Peso. Digitalization of payment systems would reduce transaction costs by (partially) replacing less efficient means of payment, e.g. paper-cash and checks. In this paper we find that the cost of using cash in Uruguay is approximately 0.61% of GDP. Interestingly, 98.1% of this cost is borne by the private sector: banks and retailers 77.1% and households 21.0%. The cost of using checks is equivalent to 0.04% of GDP. Overall, replacing paper-cash and checks by other (electronic) means of payment would imply a transaction cost reduction for the private sector of the equivalent of up to 0.65% of GDP.

Keywords

  • payment system
  • cost of cash
  • cost of checks
  • electronic payments

JEL Classification

  • D12
  • D23
  • D24
Open Access

Denoised Inflation: A New Measure of Core Inflation

Published Online: 02 Jun 2020
Page range: 131 - 154

Abstract

Abstract

Existing measures of core inflation ignore a part of ‘should be’ the core inflation. Exclusion based measures ‘exclude’ a part of persistent inflation inherently existing in the excluded part whereas filter based measures ‘filter-out’ the cyclical part also rather than the irregular component only. This study proposes a new idea to define and measure core inflation – noise free inflation or denoised inflation. As against considering only trend to define core inflation, this study proposes using cyclical component also to be part of core inflation. If core inflation is to be useful, for monetary policy making, as an indicator of underlying inflation, it has to include demand related component of inflation associated with current economic cycle. By using wavelet analysis approach to decompose seasonally adjusted price index into noise, cyclical component and trend, we estimate a denoised inflation series for Pakistan for the period July 1992 to June 2017. Since denoised inflation passes ‘statistical’ as well as ‘theoretical’ tests necessary for a series to be core inflation, we think it can be used as a new core inflation measure for Pakistan. This can also be estimated and tested for any country.

Keywords

  • Estimation of Cyclical Component
  • Inflation
  • Monetary Policy

JEL Classification

  • C19
  • E31
  • E52
Open Access

Weighting on Systemic Important Banking (SIB) in Indonesia: The Official Versus PCA Approaches

Published Online: 02 Jun 2020
Page range: 155 - 182

Abstract

Abstract

In determining its Domestic Systemic Important Banking (D-SIB), Indonesia implemented the Global Systemic Important Banking (G-SIB) based on three of five indicators, those being size, interconnectedness, and complexity. Both the G-SIB and the Indonesian D-SIB use an equal weight for each indicator, that is, 1/5 and 1/3 respectively. However, the weight could be modified by using the eigenvector of the Principal Component Analysis (PCA). We showed that this new weighting system was better than the official weighting system (referred to in this paper as the POJK approach) based on the Financial Services Authority (OJK) regulation No.46/POJK.03/2015.

Keywords

  • Eigenvectors
  • Indonesia
  • Principal Component Analysis
  • Systemic Important Banking
  • Weighting

JEL Classification

  • C38
  • E52
  • E58
Open Access

Web-based Financial Reporting Disclosure: Evidence from Selected Banks in the Kingdom of Saudi Arabia (KSA)

Published Online: 02 Jun 2020
Page range: 183 - 197

Abstract

Abstract

With insights drawn from legitimacy theory undergirding perceived relative factors expected to influence the level of Web-Based Financial Reporting Disclosure (WBFRD), this paper sheds light on the level of the Web-Based Financial Reporting Disclosure (WBFRD) in selected banks in the KSA in 2017. Several gauges exist for measuring the level of transparency and disclosure practices. As a result of the unique characteristics of the banking sectors operating in the KSA under the Sharia-compliant (Islamic) law, however, the researcher eschewed employing Standard & Poor’s Transparency and Disclosure checklist. Accordingly, the researcher designed a 90-item index based on metrics identified in previous studies. The selected banks in the KSA evince a high level of Web-Based Financial Reporting Disclosure (WBFRD) on the order of 76%. Regression analysis indicates a positive association between the independent variables Bank Size, Bank age, and Profitability on one side, and the dependent variable Web-Based Financial Reporting Disclosure (WBFRD) on the other side.

Keywords

  • Web-Portal
  • Web-Based Financial Reporting Disclosure
  • Banking sector
  • Legitimacy theory
  • KSA

JEL Classification

  • G20
  • G21
Open Access

Macro Stress Testing Credit Risk: Case of Madagascar Banking Sector

Published Online: 02 Jun 2020
Page range: 199 - 218

Abstract

Abstract

This study proposes to assess the vulnerability of banking sector’s credit portfolio under macroeconomic shocks and to evaluate its impact on banking system capitalization. Our method uses the Global Vector Autoregressive (GVAR) Model to generate adverse macroeconomic scenarios. The GVAR model is combining by the satellite credit risk equation to find the non-performing loan under stress conditions. The advantage of using GVAR model is that on the one hand, it captures the transmission of global, external and domestic macroeconomic shocks on banks non-performing loans. On the other hand, this model considers the nonlinear pattern between business cycle and the bank credit risk indicator during the extreme events as highlighting by the macro stress test literature. The forecast of non-performing loan is then used to obtain stress projections for capital requirement for the banking system level. This article attempts to fill the lacks concerning the stress testing works about Madagascar which study is a recent framework, whose no study on dynamic macro stress testing was treated before. The Results outline the interaction of aggregate non-performing loan with macroeconomic evolution. The horizon of capital prediction shows that banking sector reacts most to a GDP shock. Also, Madagascar banking sector is quite resilient and remains sufficiently capitalized under all macroeconomic scenarios designed with a solvency ratio higher than the minimum regulatory CAR ratio.

Keywords

  • Madagascar
  • macroeconomic stress test
  • credit risk
  • banking sector
  • GVAR

JEL Classification

  • C33
  • G32
  • E44

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