An Analysis of Italian Bad Loans: Determinants, Forecasts

and Transmission to the Real Economy

Alessandro Carboni and Andrea Carboni
This Draft: November 2014

Abstract
Since 2009 conditions in Italian credit market have been experiencing a dramatic
worsening, reflecting the two most severe recessions since the Great Depression. Probability of default for non financial firms has reached unexpected values, while deterioration in credit portfolios has spread. This paper studies bad loans for Italian non
financial firms during the last twenty years. We propose different linear and non-linear
methodologies focusing on short and long-term determinants, forecasting properties
and dynamic responses. Our empirical results suggest that macroeconomic and financial, but also, specified lenders and borrowers variables affect bad loans. Linear and
non-linear models augmented with financial variables and asset prices produce better
out-of-sample forecasts. A dynamic response analysis shows that default rates move
with a cyclical pattern, falling after a positive shock in macroeconomic and financial
variables. Moreover, a positive shock in bank credit or in default rate does not produce
a clear feedback effect from credit to the real economy. In a non-linear framework,
this happens only when the default rate is above a critical value, suggesting a possible
breakdown in the transmission of credit to the real economy when credit quality is
weak.

JEL Classification: C22, C32, E44, G21.

Keywords: Bad loans, credit risk, determinants, feedback effects, threshold models.

University of Siena, Master in Economics and Banking. Comments are welcome. Alessandro Carboni:
alecarbo@msn.com. Andrea Carboni: andreacarbo@tiscalinet.it. Errors and omissions remain our own
responsibility.

Introduction, Literature and Motivation

Since 2009 conditions in Italian credit market have been experiencing a dramatic worsening, reflecting the two most severe recessions since the Great Depression. Probability
of default for non financial firms has reached unexpected values, while deterioration in
credit portfolios has occurred. This phenomenon was analyzed in many financial stability
reports produced regularly since 2010 by the Italian central bank and in various ECB bank
lending surveys about current and future credit conditions.1 Credit risk has received the
attention of policy makers and academics interested in its determinants, business cycle
effects, stress testing, and more recently macroprudential policies.
There is a widespread consensus about bad loans determinants which can be divided in
macroeconomic factors, borrowers and lenders conditions.2 Berger and DeYoung (1998)
and Salas and Saurina (2002) describe theoretically the relations between determinants
and bad loans. In the first paper, the authors define four hypothesis linking bad loans to
cost efficiency in commercial banks: i) bad luck, by which external events are drivers
for an increase in bad loans; ii) bad management, relating low cost efficiency, in the
form of difficult monitoring and poor skills, to a growth in bad loans; iii) skimping, by
which, lower investments in monitoring could affect both loan quality and cost efficiency;
iv) moral hazard, with low capitalized banks responding to moral hazard incentives by
assuming more risk taking in the form of future bad loans. In the second paper, Salas and
Saurina (2002) study how the ratio of Spanish problem loans (the amount of problem loans
to total loans) relates with: real GDP growth, households and firms liabilities over GDP
and equity, and the growth rate of loans. Moreover, they add different banking specific
variables (lender determinants), like operating costs to operating margin, the ratio of non
collateralized loans to total loans, lagged values for net interest margin, the size, banks
solvency problems, a measure for the market power, and finally the lagged risk premium
charged by banks. They study both commercial and savings banks and find that: i) higher
past values of real GDP and lower borrowers indebtedness are negative drivers of problem
loans; ii) an increase in loan growth and managerial incentives determine future loan losses;
iii) they also find different impacts of lenders specific variables for commercial and saving
banks. There are other interesting related papers. Murto (1994) uses macroeconomic and
banking specific determinants, together with contractual dummies, to study the pricing
for bank loans in Finland. Shockley (1995) analyzes the relation between bank lending
and corporate leverage, while Booth and Booth (2006) demonstrate that moral hazard
could explain why secure lending increases with default risk. Keeton (1999) offers an
analysis of how loan growth can or can not lead to higher loan losses. The author defines
three possible shifts: i) positive supply shifts, represented by a reduction in lending rate
charged on new loans and lower minimum standards, generate the following channel: lower
credit standards, higher loan growth and higher loan losses; ii) a positive demand shift:
1

Bank of Italy (2013) focuses on the asset quality review on non-performing loans.
The literature on bad loans for countries all over the world is enormous. Here we referenced papers
studying advanced banking systems.
2

an increase in demand for credit unrelated to borrowers ability to pay will increase loan
growth, lending rates and tighten credit standards, raising the average credit worthiness
with a corresponding reduction in future loan losses; iii) a positive productivity shift
boosts loan growth and reduces future loan losses. Jimenez and Saurina (2006) confirm the
relationship between rapid lagged credit growth and loan losses, especially during booms
in credit cycles. Ghosh (2005) considers a simultaneous equation model for non-performing
loans in India, using real GDP growth, inflation, M3 growth, real cost of capital and real
effective exchange rate as macro determinants, while corporate sector leverage and the
ratio of capital to risk-weighted assets, for the others.3 The author finds negative signs for
current and lagged values of real GDP, as well as for current inflation. Lagged capital to
risk-weighted assets enters with a negative impact, while higher leverage and interest rates
raise non-performing loans.4 Rinaldi and Sanchis-Arellano (2006) and Louzis et al. (2010)
demonstrate unit root properties in non-performing loans for a panel of European countries
and for the Greek banking sector, respectively. Among the others, their empirical results
broadly confirm the signs of the determinants previously described. Louzis et al. (2010)
also study the role of lagged bank ratios, adding and confirming the bad management II
hypothesis, by which worse banking performance is positively associated to an increase in
future bad loans. With a panel analysis, Klein (2013) adds lagged values of banks return
on equity to the other banks determinants, obtaining a negative response, while Beck et
al. (2013) consider current and past asset prices, in the form of nominal effective exchange
rates and share prices, and obtain a negative reaction of bad loans. The role of collateral
was studied by Jimenez and Saurina (2004) and Jimenez et al. (2004), who analyzed
micro data characteristics at single loan level, extracted from the Spanish banking credit
register. They find that collateralised loans have a higher probability of default, and that
the use of collateral is high for low credit quality loans. Moreover, they also confirm that
a longer lender-borrower relationship reduces the required collateral.5
Stress testing exercises allow both regulators to understand the resilience of the entire
banking system against adverse scenarios, and managers to have an idea about their institution, especially for the credit risk side.6 Among the others, we refer to Hoggart et al.
(2005) for an application of stress test to UK banks, Jakubk and Schmeider (2008) for
specific application of credit risk stress testing for Czech republic and Germany. Moreover, Gasha and Morales (2004) study a self extracting threshold autoregressive (SETAR)
model to identify threshold effects for credit risk stress testing, while in the last years,
Serwa (2011) and (2013) deals with multiple regimes in a model with credit to households
and with non-performing loans during booms and busts in credit cycle, finding different
3

Non-performing loans, capital to risk-weighted assets, corporate leverage and real cost of capital are
endogenous variables. See Ghosh (2005) for further information.
4
Similar determinants were used by Athanasoglou et al. (2008) in a study of banking profitability.
5
We remember, among others, the paper of Beck et al. (2014) for a study of relationship banking over
the business cycle.
6
See Quagliariello (2009) for an overview of the stress testing methodology.

responses for different regimes.7 Another stream of literature deals with the feedback
effects of credit risk to the macroeconomy. We remember the studies of Gambera (2000)
and more recently Nkusu (2011) and Klein (2013). The first paper uses bivariate vector
autoregression (VAR) linking the quality of bank loans to the business cycle, while Nkusu
(2011) and Klein (2013) study dynamic responses of non-performing loans in a panel VAR
model with bad loans and macroeconomic determinants. They find that non-performing
loans are affected by macro determinants, and also demonstrate that there is a feedback
effect from the banking sector to the entire economy.
During the last years, macroprudential analysis has become essential in central banking, together with price-stability oriented monetary policy, in order to deal with financial
stability. The literature on macroprudential policies is immense. Among others, we mention the paper of Borio et al. (2001), the overview provided by Banque de France (2014),
Smets (2013) and the final report of the Macro-prudential research network (MaRs).8
Jimenez et al. (2014) study the effect of monetary policy on credit risk taking using loanlevel micro data from the Spanish credit register. They find that lower overnight rates
are related to a prolonged increase in credit issued by low capitalized banks to riskier
borrowers. Moreover, lower long-term rate has no influence on credit. In a related paper, Jimenez et al. (2013) find that dynamic countercyclical loan loss provisions in Spain
helps restoring credit market stability during credit cycles.9 Finally, Behn et al. (2014)
study model-based regulation applied to Germany and show that: internal risk models systematically underestimate default probabilities; loans originated within the model-based
regulation have higher default rates and therefore higher interest rates charged. They
conclude that model-based capital regulation adversely affect financial stability (Behn et
al, 2014).
The Italian experience has a separated treatment in our overview of the literature.
Bank of Italys economists accurately study the evolution and the implications of the
Italian banking system. Quagliariello (2004) analyzes the reaction of Italian banks performance to the evolution of the business cycle describing, theoretically, the transmission
mechanism from the macroeconomy to the banking sector and, empirically, the procyclicality of banks balance sheet. Marcucci and Quagliariello (2006) and (2008) further reinforce
the procyclicality of banks portfolio riskiness through a VAR, while they also document
different credit behaviors over different regimes performing threshold regression analysis.
Fiori and Iannotti (2010) study the interaction between market and credit risk using a
factor augmented VAR (FAVAR) approach on a large data set and provide evidence of
feedback effects from the financial sector to the real economy. Bofondi and Ropele (2011)
offer an analysis of macroeconomic determinants of bad loans for both non financial firms
and households. They also produce forecasts of bad loans. They find that a small number
of macroeconomic variables helps predicting bad loans, even in turbulent times. De Mitri
7

See Mendoza and Terrones (2012) for a description of the anatomy of the credit boom.
See European System of Central Banks (2014)
9
They confirm the study of Jimenez and Saurina (2006) about the usefulness of this countercyclical tool
for the Spanish banking system.
8

et al. (2010) use micro data from Centrale dei Rischi (the Italian credit register) and from
Centrale dei bilanci (company accounts data service) matching bank data with balance
sheet information of the borrower. In a panel analysis, they show that relationship lending changes after a financial turmoil, and particularly that firms that borrow from a small
number of banks are more insulated from supply shock in credit markets (De Mitri et al.,
2010). More recently, Gambacorta and Mistrulli (2014) find that borrowers with closer
and long-lasting bank relationship have lower interest rate spreads and that borrowing
from banks with large capital and liquidity buffers, but also mainly involved in traditional
lending, assure protection against the effects of the financial crisis. Finally, Albertazzi et
al. (2014) present evidence of the impact of the sovereign crisis (measured by the 10 year
BTP - Bund spread) on different banking indicators, especially for term deposit, newly
issued bonds and loans growth. This impact is amplified for larger banks.
In this paper we study Italian bad loans for non financial firms over the last twenty
years presenting different methodologies. We analyze determinants of bad loans, focusing
on macroeconomic, financial and specific lenders and borrowers variables, following the
lines of the literature. Balaid (2014) is the closest paper to ours, even if the author uses
different methods. We produce evidence with linear and non-linear models, similar to
Marcucci and Quagliariello (2008). Moreover, unconditional and conditional forecasts are
presented, in line of the exercises of Bofondi and Ropele (2011) and the credit risk stress
testing literature. Finally we offer different linear and non-linear models to understand
feedback effects, in general, and specifically the impact on bad loans, as in Quagliariello
and Marcucci (2006) and Klein (2013), among the others. Our empirical results suggest
that macroeconomic and financial, but also, lenders and borrowers variables determine
bad loans. Linear and non-linear models augmented with financial variables and asset
prices produce better out-of-sample forecasts. A dynamic response analysis shows that
default rates move with a cyclical pattern, falling as a consequence of a positive shock
in macroeconomic and financial variables. Moreover a positive shock in bank credit or in
default rate does not produce a clear feedback effect from credit to the real economy. In
a non-linear framework, this happens only when the default rate is above a critical value,
suggesting that when credit quality is weak, a possible breakdown in the transmission
of credit to the real economy can occur. The paper is organized as follows: Section (2)
presents definitions of bad loans and time series properties. Section (3) treats linear model
for determinants, while Section (4) non-linear models. Unconditional and conditional
forecasting is offered in Section (5), dynamic analysis in Section (6), while Section (7)
summarizes the main conclusions. An Appendix at the end describes tables, figures and
data.

Data

According to Bank of Italy (2011), bad loans are defined as the total exposure to insolvent borrowers, those globally unable to cover financial obligations and not expected to

recover, even if it does not necessarily result in legally ascertained bankruptcy. Financial
intermediaries evaluates creditworthiness and decide to classify borrowers as defaulted by
registering through Centrale dei Rischi (the Italian Credit Register) an amount equal to
their exposure, regardless of any collateral received. We concentrate on two different definitions of Italian bad loans: 1) the ratio between the flows of bad loans for non financial
firms at year t, over the stock of performing loans at year t 1 and 2) the ratio between
the stock of bad loans and total loans, both at time t.10 The first one can be interpreted
as the default rate over the banking system, while the second reflects credit quality within
banks balance sheets. In this way, we can compare a more timely measure of credit risk,
similar to the probability of default in Duffie and Singleton (2003), with a point-in-time
indicator, based on stocks, rather than flows, more familiar with accounting and corporate
finance.
We look for determinants of our target variable by inspecting a large dataset, divided
in macroeconomic, financial, asset prices, bank specific and industrial variables. Bad loans
are from the Bank of Italy Statistical Database for non financial corporations and micro
firms.11 Table (1) presents summary statistics. An Appendix at the end describes the
variables employed, the method adopted for their computation, the sample availability
and their source. Figure (1) inspects credit riskiness for Italian firms, while Figure (2)
looks at the evolution of selected economic indicators. In Figure (1) both graphs show
that credit riskiness follows recessions, depicted in shaded areas according to Economic
Cycle Research Institute (ECRI). This feature is stronger for the first period (EMS crisis,
1992Q1-1993Q3) and after the beginning of the financial crisis (2007Q3-2009Q1), where
the default rate (credit quality) started to increase dramatically after four quarters. The
response to the last recession (2011Q2-) is instead more rapid, with a reaction after only
two quarters. This could suggest a change in the lending cycle, due to jumps in bad
loans, but also to the breakdown of the traditional intermediation activity for banks.
Hence, at least from a first sight, both supply and demand for credit are affected. See
Freixas and Rochet (2008), Asea and Blomberg (1997), and Delis et al. (2014), among
others.12 In Figure (2) business cycles paths are captured by real GDP and economic
sentiment indicators. The plots of interest rates confirm the severity of EMS crisis, with
an inverted yield curve, while, in the last part, the sovereign debt crisis causes an upturn
in both the spread between Italian Treasury bonds (BTP) and German Treasury bonds
(Bund) and between long and short rates. Residential property prices and bank credit to
non financial firms exhibit a similar pattern, which is less closer in 2003 - with a peak in
property prices - and in years 2008 and 2010. The recession started in 2011Q2 produces
a sharp decrease in bank credit, which goes into negative territory since 2012Q2.
10

According to Bank of Italy (2014), total loans is the sum of repurchase agreements, performing and
non-performing loans.
11
Specifically, non financial corporations and micro firms are named respectively as Societ`
a non finanziarie and Famiglie Produttrici.
12
See also Cure (2012) about the freezing of the monetary transmission mechanism in period of crisis
and for a clear interpretation of what happened to the bank lending channel.

Table (2) presents comovements among default rates and our selected variables, summarizing macroeconomic and financial environments, but also banks and firms specific
characteristics. Macroeconomic variables anticipate default rates, confirming the empirical evidence found in the literature. However, as in Bofondi and Ropele (2011), real GDP
growth, unemployment rate and current account to GDP move slower than our target
variable for the sample considered. Financial variables and asset prices exhibit their predictive content for default rates. This is stronger for short and long rate, but also for the
spread between BTP and Bund. Banks and firms indicators are also good predictors of
default rates, suggesting that a profitable, efficient and capitalized banking system is a
precondition for a sound credit portfolio (supply side). On the demand side, instead, a
profitable, efficient and adequately balanced firm is a precondition for debt servicing.13
Table (3) replicates the same analysis on the definition based on the stock of bad loans.
Without loss of generality, we can confirm previous results and implications, even if comovements with macroeconomic and financial variables are more persistent, while those
on banks and firms specific indicators show lower cross-correlations.14 In order to further
analyze the statistical properties of the variables, different unit root tests are presented
in Table (4), focusing on linearities and non-linearities, in the form of one and two breaks
in the series. In particular, we perform the augmented Dickey and Fuller (1979) test, the
KPSS test of Kwiatkowski et al. (1992), the DF-GLS test of Elliot et al. (1996), but
also the Zivot and Andrews (1992) test, the LS test of Lee and Strazicich (2003), and the
test of Perron (2006) for a one or two breaks in the unit root properties of a time series.
Perron (1990) distinguishes between innovational outliers (IO), with a shift in the error
process and additive outliers (AO), with a change in the level of the process. Looking at
Figure (2) we decided to move in favor of an AO model.15 The left block of the Table deals
with test for unit root without breaks. We can broadly confirm that the majority of our
listed variables contains a unit root during the period analyzed. This is also supported for
our two credit riskiness indicators. The right block instead describes unit root tests with
breaks. Results suggest that the null hypothesis of unit root with one or two breaks is not
rejected, and the proposed dates, corresponding to minimum t-statistics on the coefficient
for one lagged riskiness indicator in the different models, seem replicate breaks from Figure
(1).16
13

Specifically, we use the expressions profitable, efficient and capitalized or adequately balanced
to be in line with indicators used: profitable is concerned with ROE, efficient, with ROA and inversely
with operating costs to income and capitalized or adequately balanced with capital and financial
structure. See the Appendix for more details.
14
In the spirit of business cycle literature, i.e. Stock and Watson (1999), we conducted an alternative
analysis by using the same determinants expressed in their cyclical component (i.e. the difference between
the level and the filtered variable, calculated with an Hodrick-Prescott filter with tuning parameter =
1600) with similar evidence for both credit quality indicators. Results are available from the authors upon
request.
15
See also Table (3) for additional information about the null hypothesis for these tests.
16
Results for the entire dataset, not shown, are available from the authors upon request.

Determinants

Macroeconomic, financial, banks and firms specific variables are main determinants of
bad loans. See for example Beck et al. (2013) and Bofondi and Ropele (2011), Louzis
et al. (2010), Salas and Saurina (2002) and Klein (2013), and Ghosh (2005), for each
group, respectively. Giving previous results, we decided to analyze differenced variables
to avoid the problem of spurious regressions with misspecified fitting and residuals autocorrelation.17 Hence, our study could be interpreted, at least for these experiments, with
a short-run perspective. Equations (1) and (2) describe our models of interest:

Risk Indicator = +

p
X

q
X

i Risk Indicatorti +

i=1

i Determinantsti + t (1)

i=0/1

and
Risk Indicator = +

p
X

q
X

i Risk Indicatorti +

i=1

i=0/1

i Determinantsti +

(2)

+ (Anxious Dummies)t + t ,
where Risk Indicator reflects our proposed definitions and Determinants are our predictors. Graphical inspection, cross-correlations evidence, literature on lending cycles and
their stylized facts, suggest to concentrate on current and lagged values of determinants.18
Similar to Bofondi and Ropele (2011) and Ghosh (2005), we select the number of lags p
and q for Equations (1) and (2) in stepwise regressions, by checking the statistical significance of the estimated coefficients. Our models also include different dummies to take care
of anxious episodes, recently studied by Delies et al. (2014) and Fostel and Geanakolpos
(2008) for leverage cycles. As in the first paper, anxious dummies correspond to those
quarters with a consecutive two quarters decline in agents (firms and bankers) confidence,
measured by surveys, when the economy is not in a recession.19
Tables (6) to (9) present our estimates based on models in Table (5). Specifically, we
use pre-specified set of variables in models (a) to (d), while in models (e) - (e) the first
three factors from a principal component analysis.20 Column (f) presents the Bofondi and
17

Ghosh (2005) implicitly bypasses this problem with a linear trend in his model equation for levels
of credit quality indicators. Louzis et al. (2010) and Rinaldi and Sanchis-Arellano (2006) confirm the
presence of non-stationarity in non-performing loans.
18
See once again Asea and Blomberg (1997), Berger and DeYoung (1997), Keeton (1999), and more
recently Puri et al. (2011), Claessens and Kose (2014), DellAriccia et al. (2014), and ESRB (2014b). See
also Albertazzi et al. (2014) and Gambacorta and Mistrulli (2014) for the Italian experience.
19
Specifically, we use business surveys from Eurostat, Economic Sentiment Indicator from European
Commission and Bank Lending Survey from European Central Bank. See Table (5) and the notes of
Tables (6) and (8) for further information.
20
Following Stock and Watson (2002), we extract three principal components explaining more than 50%

Ropele (2011) model, while the estimation of the Ghosh (2005) model with instrumental
variables is shown in column (g). Moreover, columns (h) to (l) describe results from Louzis
et al. (2010), and column (m) repeats the same analysis with loan loss provisions over
loans, as alternative bank determinant.
As in Louzis et al. (2010), selected lagged values of default rate show a negative persistence over three periods across models analyzed. Evidence on macroeconomic variables
confirms expected signs, in line with empirical literature. More specifically, past values of
real GDP growth, investments and current account over GDP help predict a reduction in
future default rates for Italian firms. On the other hand, unemployment rate is positively
correlated with credit riskiness. The evidence on CPI is uncertain, while both the three
month rate and real lending rate have expected sign for shorter horizons. Results for asset
prices and bank credit support their role in determining future values of default rates, as
expected. Banking variables confirm that higher ROA, liquidity and capital decrease default rates. However, lower efficiency measured by the cost income ratio reinforce default
rates. This evidence is in line with bad management, skimping and moral hazard
hypothesis in Berger and DeYoung (1997), and with bad management II hypothesis suggested by Louzis et al. (2014). Estimates do not suggest a clear interpretation for leverage
and loan loss provisions over loans: for the first, a risky bank, highly levered, is not necessarily a bank with a mediocre credit portfolio, while for the second, the management
of loan loss provisions depends on expectations of future bad loans (positive coefficient),
as well as on balance sheet issues (negative coefficient). Firm specific determinants enter
in model with expected sign, except for leverage in model (d). A riskier, more financially
constrained and low capitalized firm is expected to default and therefore to increase bad
loans over the banking system. Determinants from principal component analysis denotes
a significant role only for the third factor, suggesting that liquidity and expectations are
predictors of bad loans. In Table (7), we re-estimate the same models by adding anxiety
dummies as in Delis et al. (2014). Results are in line with our expectations only for
the Bank Lending Survey dummy, which confirms procyclicality of bank credit, especially
during anxious periods. The negative sign of the ESI dummy, derived from both demand
and supply effects, could instead reflect anxiety in flows of bad loans.
Tables (8) and (9) do the same exercise for the ratio between the stock of bad loans over
total loans. The evidence broadly confirms previous findings, but with minor differences:
we can see a lower persistence for lagged values of the target variable, but also a more
pronounced negative impact of liquidity ratio. Moreover, anxiety dummies from business
and banking sector present different signs reflecting opposite views for both borrowers and
lenders during turbulent times.
of variance, and define them as: macroeconomic factor, liquidity factor and expectations factor. The
Appendix on factor model contains R-squared plotted as bar charts for each variable and the graphical
evolution of the three extracted factors. See also Fiori and Iannotti (2010) for a similar analysis.

Threshold and Switching Models

Since the financial crisis erupted, bad loans experienced an unprecedented growth as a
result of a deterioration among main macroeconomic and financial indicators, as reported
in Figures (1) and (2). This represents a huge breakdown with respect to the historical
path, also confirmed by previous statistical tests for the presence of breaks. Given this evidence, this Section is therefore dedicated to non-linearities in bad loans. We present two
classes of models, i) threshold models, in which the threshold is observed as an estimated
value of the bad loans and ii) regime-switching models, where each regime is determined
by the value of an unobserved state variable, usually modeled as a first order Markov
chain. See Hamilton (1989) and (1994), for an econometric analysis of switching models,
Terasvirta (1994) and (2006) for threshold models, and more recently Gasha and Morales
(2006), Serwa (2011), Franta (2013) and Marcucci and Quagliariello (2008) for an application of threshold effects in credit risk stress testing, multiple regimes in credit markets
for OECD countries, non-linearities between credit conditions and economic activity, and
for an application to Italian adjusted default rate, respectively.

4.1

Smooth Transition Regression (STR): LSTR and ESTR for Bad

Loans

The STR model can be stated as follows:

yt = 0 Xt + 0 Xt G (Ztd , , c) + t ,
0

(3)

where =
(1 , 2 , ..., m ) and = (1 , 2 , ..., m ) are parameter vectors, while t

i.i.d. 0, 2 . The transition function G (Ztd , , c) is bounded between zero and one and
is continuous everywhere in the parameter space for any value of Ztd . G (Ztd , , c)
depends upon a scale or slope parameter and a location parameter c, but also on the
threshold variable Ztd which is a lagged value of the dependent variable. We use two
transition functions, the logistic LSTR and the exponential ESTR:
(
1
1 [1 +exp ( (Ztd c))]
for LSTR

G (Ztd , , c) =
(4)
2
1 exp (Ztd c)
for ESTR
In Equation (3), yt is alternatively one of our indicators, while Xt contains selected explanatory variables. As LSTR converges to a threshold model with break at c;
as 0, it converges to least squares.21 We adopted the following procedure: first, we
test for non-linearities, then we decide the shape of the transition function and finally we
specify and estimate the model. For the first point, we select the delay d as the optimal
lag from information criteria, after testing for linearity versus LSTR or ESTR, with a
Lagrange multiplier (LM) test. Finally we estimate the model by non-linear least squares.
21

For computational purposes, we replace with / for the LSTR model, while / 2 for the ESTR
model, where is the standard deviation of Z. The mean of Z is the guessed initial value of c.

10

Results from the LM test point to an LSTR for default rate but ESTR for the ratio between the stock of bad loans and total loans. In both two cases, the threshold variable is
the indicator with eight lags. Our estimation strategy is based on the same set of determinants presented in Section (3). We therefore proceed as follows: separate estimation of the
standard and the transition equation with same variables; choice of statistically significant
determinants; re-estimation of both standard and transition equation; final estimation of
Equation (3).
Table (10) presents results for the LSTR model, while Table (11) those for the ESTR
model. Once the target variable goes above the threshold value c, the model depicts a
more pronounced reaction to past movements in different determinants. This is more
clear in the LSTR model, where variables have higher coefficients (in absolute value) in
the transition equation, while the ESTR model does not offer an obvious interpretation.
Looking at the values of the two unobserved coefficients and c, both models exhibit
a change in regime when the target indicator is approximately above its mean. More
specifically, we find that c ranges from 0.764 to 0.839 for default rates, while from 5.574
to 7.249 for the other definition. During the last two recessions, credit risk indicators
goes above c in 2011Q3 for default rate, and in 2010Q3 for the ratio between the stock of
bad loans and total loans: remembering Figure (1), a jump occurs around these specified
dates.

4.2

Hamilton Switching Model for Bad Loans

Switching models allow us to extract the probability of migration from a regime to another
in a simple univariate framework for bad loans. We apply the Hamilton switching model,
Hamilton (1989), to bad loans which are assumed to follow different time series processes
over two different regimes:








yt = st +01 yt1 st1 +02 yt2 st2 +03 yt3 st3 +04 yt4 st4 +t ,
(5)

where yt is the growth rate of the target variable, std is the average growth rate with
lags d = 0, ..., 4, while s follows a two-state Markov chain with transition probability
pij .22 Table (12) shows results from the maximum likelihood estimation of the Hamilton
switching model: states 1 and 2 are the contractionary and expansionary regimes, i.e. an
improvement in credit quality conditions and a deterioration of credit worthiness. P(1,1)
is the probability that contraction will be followed by another quarter of contraction, so
that this regime will persist for 1/ (1 P (1, 1)), whilst P(1,2) = 1 - P(2,2), where P(2,2)
is the probability that an expansion will be followed by another quarter of expansion, with
duration 1/ (1 P (2, 2)). Looking at default rates, the average growth in expansions is
higher than in contractions and s indicate upward persistence. Each regime has a long
memory, and if we look at SBL / Loans we can see that the duration of an expansionary
regime is about 7 quarters. Figure (3) provides estimated transition probabilities from
22

See Chapter 22 of Hamilton (1994) for a theoretical background.

11

an expansionary regime followed by another expansionary quarter for both credit risk
definitions, together with the time series of the growth rates. The evolution of default rates
is adequately followed by the transition probability of being in an expansionary regime:
since the financial crisis and after the sovereign debt crisis, the transition probability is
close to 1, indicating that the deterioration of credit riskiness persists. Moreover, it starts
going up since 2006Q4, approximately one year before the beginning of the recession, and
two years before the visible spike in bad loans.

Forecasting and Scenario-Based Analysis

Concluded the analysis of determinants in linear and non-linear models, it is time to

point towards multivariate frameworks, to deeply understand the relationship between
the previously selected macroeconomic, financial and specific microeconomic (banking
and firms) variables and credit riskiness indicators.23 This Section deals with this issue
by using different vector autoregressions (VARs) to forecast bad loans. More precisely, we
focus on the impact of determinants on credit riskiness.24 Moreover, following the lines of
ESRB (2014) and ECB (2014), we also conduct a stress testing exercise, conditioning our
models to produce scenario-based forecasts. Before going on, however, it is important to
remark that the estimation strategy adopted in Section (3) was conducted on differenced
variables, with a short-term focus. Therefore, the first task of this Section is describing
long-term properties of credit quality indicators and determinants, as a background for
the next level, forecasting.

5.1

Long-Term Analysis

Generally, long-term analysis of economic and financial variables develops on a theoretical

basis, the starting point for any robust assessment and interpretation of the long-term
behavior of the phenomenon analyzed. The purchasing power parity (PPP), in economics,
and the credit default swap basis, in finance are two good examples. In our specified
case, among the others, Rinaldi and Sanchis-Arellano (2006) and Klein (2013) study nonperforming loans in a panel environment and perform unit root and cointegration analysis,
extracting a unique long-term cointegrating vector relating households non-performing
loans to macroeconomic variables.25 Time series analysis also requires both unit root
tests, performed in Section (2) and cointegration tests, like Johansen (1988) and (1991)
trace and max, together with an estimation of the cointegrating vector.26 Results
23
We remember the studies of Gambera (2000), Marcucci and Quagliariello (2006), and Klein (2013)
for vector autoregression models, while, Fiori and Iannotti (2010) and more recently Bessler and Kurman
(2014) for the use of a factor augmented vector autoregression model. IMF (2010) Global Financial Stability
Report studies impulse response function from a VAR for emerging markets.
24
For a two-way relationship, i.e. feedback effects, the reader is referred to Section (6).
25
See Section (5) of Rinaldi and Sanchis-Arellano (2006).
26
See Hamilton (1994) for a general treatment and Juselius (2006) for cointegration analysis in the VAR
model.

12

for cointegration analysis performed on different models are illustrated in Table (13). It
is obvious that both Johansens tests confirm that the cointegrating vector is not unique
for different credit quality indicators.
To be more precise, when the cointegration rank is larger than one, or when the number
of cointegrating vectors is greater than one, there is an identification problem. Therefore,
the interpretation of long-run equilibria is not straightforward. Without a strong and
robust long-term theory for the selected variables in hand, we decided to follow another
strand of the literature on cointegration by focusing on bivariate vectors27 , with thresholds,
breaks and asymmetric behaviors. The referenced papers are: Balke and Fomby (1997),
Tsay (1998), Enders and Granger (1998), Enders and Siklos (2001) and Hansen and Seo
(2002), among the others, while Tong (1983) provides an excellent textbook treatment on
threshold autoregressive (TAR) models.
Once cointegration tests confirm the presence of a long-run relationship, bivariate
vectors are formed using the difference between the default risk indicator and selected
determinants, taken at different lags, to understand the interactions of micro and macroeconomic variables with default rate. Cointegrating vectors are evaluated alternatively with
Stock and Watson (1993) dynamic OLS and with the Engle and Granger (1987) procedure.
We start with the TAR process described as:
yt = It 1 [yt1 a0 ] + (1 It ) 2 [yt1 a0 ] +

p1
X

i yti + t ,

(6)

i=1

where the Heaviside indicator function assumes the following form:


1 if yt1 a0
It =
0 if yt1 < a0 .

(7)

In Equation (6), we assume that the cointegrating vector yt has an equilibrium point
around a0 , the attractor, which can be interpreted as the long-run distance between default
rate and the other variable. Then, we test how the model coefficients 1 and 2 change
through different regimes, denoting an asymmetric reaction. According to Enders and
Granger (1998), 2 < (1 , 2 ) < 0 is required for stationarity of the series, while both 1
and 2 should be negative to have a convergent process, as suggested by Enders and Siklos
(2001). Following the lines of Enders and Granger (1998), we inspect the behavior of the
default rate indicator with:
Def. Ratet = + 1 (Def. Ratet1 ) + 2 (Def. Ratet2 ) + 1 (Determinantt1 ) +
2 (Determinantt2 ) + m (z plust1 ) + m (z minust1 ) + t ,
(8)
where (z plust1 ) = It (Def. Ratet1 dols Determinantt1 attractor) and (z minust1 ) =
(1 It ) (Def. Ratet1 dols Determinantt1 attractor).
27

This is the same to apply zero restrictions on all beta coefficients, except for the variable considered
in the bivariate cointegrating relation.

13

Tests for the significance and for the equality of the coefficients, the estimations of the
attractor and asymmetric coefficients z are depicted in Table (14). dols coefficients are
in line with the theory proposed in the Introduction and empirically confirmed in Section
(3): interest rates have a positive correlation with default rates while for macroeconomic
variables and asset prices the opposite is true. However, we do not obtain a clear response
from micro banking and firms variables. Results from columns Above and Below
point toward an asymmetric long-term adjustment, such that the attractor is stronger
for positive changes in the relationship between default rate and alternatively, real GDP,
investments, CPI, stock returns and lending spreads. On the other hand, we have an
asymmetric long-term adjustment, such that the attractor is stronger for negative changes
in the relationship between default rate and, alternatively, long rate, debt to GDP, residential property prices and bank credit. An accurate analysis of z plus and z minus
in Equation (8) reveals two interesting points. First, an intense long-term response to a
positive discrepancy between the default rate and, alternatively, real GDP, investments,
CPI, stock returns and lending spreads, denotes a faster reaction during periods of recession, lower consumer prices, stock returns and interest rate spreads, respectively. Second,
we observe a deep long-term response to a negative discrepancy between the default rate
and, alternatively long rate, debt to GDP, as well as residential property prices and bank
credit. In this last case, when the growth rate of residential property prices goes down,
reduction in the value of collateral occurs and, therefore, a strong response in default rates
is registered. Moreover, results for capital to loans and loan loss provisions to loans seem
to be affected by the two-way relationship between bad loans and credit risk management.
For robustness we conduct an analysis in the spirit of Enders and Siklos (2001) on the
same set of variables, using this equation:
t = It 1 t1 + (1 It ) 2 t1 +

p1
X

i ti + t ,

(9)

i=1

where the Heaviside indicator function now has the following form:

1 if Determinantt1
It =
0 if Determinantt1 < ,

(10)

where is the estimated threshold for the determinant. When is unknown, we need
to search for a value that minimizes the sum of squared residuals for a superconsistent
estimation, as in Chan (1993). Applying a trimming of 15%, each of the remaining values
are taken as possible thresholds. Residuals are instead derived from the Engle and Granger
(1987) procedure. Results in Table (15) substantially confirm those in Table (14), but also
add more information: as example, thresholds for unemployment rate range from 6.50%
to 7.40%, while those for spread from 125 to 460 basis points, that could correspond to
figures at the beginning of the financial and the sovereign crisis.
Finally, to further reinforce long-term analysis, we propose the Hansen and Seo (2002)
test of linear versus threshold cointegration, together with the estimation of the bivariate
14

VECM. The following model is estimated:

 0
A1 Xt1 () if wt1 ()
xt =
A02 Xt1 () if wt1 () > ,

(11)

where Xt1 () = (1, wt1 () , xt1 , xt2 ), and the notation () means that we are
evaluated at generic value of , while is the threshold.
In Table (16), when the results are significant, macroeconomic variables indicate a
more incisive reaction in the above regime: this is true for CPI, debt to GDP, the slope
and the first factor from the principal component analysis. The opposite holds for loan loss
provisions, while interest expenses show a huge reaction in the below regime.28 This could
be in line with the selected break dates, coinciding, for example, with the introduction
of Basel regulatory frameworks in late nineties, or with the adoption of near-zero interest
rate policies by the ECB.
To sum up, all the results illustrated in this Section allow us to confirm the longterm relationship between the default rate of Italian non financial firms and selected
determinants in a bivariate environment. The behavior of this linkage is clearly different
for the two regimes considered and denotes a more pronounced, and therefore, fast reaction
of our variables in the above regime.

5.2

Vector Autoregressions

Now time has come to analyze multivariate frameworks for forecasting purposes. We
build models with non differenced variables, against what we have done in Section (3).
Despite their flexibility and ability to fit the data, unrestricted VARs suffer from the
risks of overparameterization and imprecise inference, causing large uncertainty about the
future paths projected by the model. See, among others, the survey by Karlsson (2013).
Sims et al. (1990) confirm that the stationarity of the series is unnecessary in Bayesian
VAR (BVAR) models, while Hamilton (1994) demonstrates that a VAR model built with
variables in levels is the same as the VECM model, expect for the study of the cointegrating
vector. Given these theoretical features and based on what we have found from non-linear
analysis, we decided to produce forecasting with the following different models: i) BVAR
model with Minnesota prior, in the spirit of Doan et al. (1984) and Litterman (1986); ii)
a factor augmented VAR (FAVAR), as in Bernanke et al. (2004); iii) a threshold VAR
(TVAR) following the study of Balke (2000); iv) the threshold bivariate VECM of Balke
and Fomby (1997).
The BVAR we present is based on Minnesota priors, where the standard priors have
the following characteristics: the priors on the deterministic variables, in each equation,
are flat; the prior distributions on the lags of the endogenous variables are independent
Gaussian; the means of the prior distributions for all coefficients are zero, except for the
28

Given the problems of discontinuity in the likelihood function, we add four variables for which the
estimated p-value is near the non rejection region.

15

first lag of the dependent variable in each equation which has a prior mean of one. In this
case, coefficients have variances as functions of a small number of hyperparameters. The
standard deviation of the prior distribution for lag l of variable j in equation i assumes
the form:
{g(l)f (i, j)} si
; f (i, i) = g(l) = 1.0,
S (i, j, l) =
sj
where si is the standard error of a univariate autoregression on equation i, is the standard
deviation on the first own lag, g(l) is the tightness on lag l relative to lag 1, and f (i, j)
is the tightness on variable j in equation i relative to variable i. We use = .1, g(l) = 1
and f (i, j) = .5.
The FAVAR consists of two steps: unobservable factors are extracted from a large
dataset, as in Stock and Watson (2002) and common latent factors are put in a VAR.
The assumption is that the dynamics can be represented by the following VAR (transition
equation):


 
Ft1
Ft
+ t , t N (0, ) .
(12)
= (L)
Yt1
Yt
Equation (12) is a VAR in (Ft , Yt ) which cannot be estimated directly because factors
Ft are unobservable. The inference is possible through a set of observable variables, our
dataset Xt , which we assume to be related with unobservable factors Ft and with the
observed variables Yt by an observation equation of the form:
Xt = f Ft + y Yt + et ,

(13)

where f is a matrix of factor loadings and et is a vector of idiosyncratic errors that

must vanish at infinity. The main idea is that both observed variables Yt and the unobservable factors Ft represent common forces driving the dynamics of Xt .
The TVAR model of Balke (2000) is expressed as:


Yt = A1 Yt + B 1 (L) Yt1 + A2 Yt + B 2 (L) Yt1 I (ctd > ) + Ut ,
(14)
where Yt is the vector of endogenous variables, B 1 (L) and B 2 (L) are lag polynomial
matrices, while Ut is a vector of disturbances. Moreover, ctd is the threshold variable,
that determines which regime the system is in, and I (ctd > ) = 1 when ctd > and
zero otherwise. We fix d = 1, as in the original paper and in Marcucci and Quagliariello
(2008), while c is the target credit quality indicator.29
Finally, following Balke and Fomby (1997) we propose a threshold biviariate VECM
between the credit risk indicator and unemployment rate, chosen among different macroeconomic variables from the analysis in Table (15). The model is the following:
(i)

(i)

(i)

(i)
Xt = (i)
(L) Xt + 1 It zt1 + +2 (1 It ) zt1 t ,
x +C

(15)

29
The threshold value is not known a priori and is estimated by least squares with a value of 0.742
for default rate and 5.556 for the stock of bad loans over total loans. The difference between regimes are
strongly confirmed by a likelihood ratio test. The estimated thresholds are very close to the ones estimated
in Section (4.1) from the STR models.

16

where


It =

1 if ztd
0 if ztd < .

(16)

The threshold delay d is estimated with the Tsay (1998) test for threshold autoregressive
models. Both models for the two definitions indicate 4 lags for the delay. A complete
list of models and variables used is presented in Table (17), where we also add an ARMA
model for comparison.
We estimate each model through 2010Q1, leaving 2010Q2-2014Q2 for examining the
accuracy of out-of-sample forecasts at horizons one to eight quarters ahead. More specifically, the models are estimated through 2010Q1 and a set of out-of-sample forecasts one
to eight steps ahead are computed, spanning the period 2010Q2-2012Q2. Next, a new
observation is added to the estimation sample and a new set of forecasts are computed,
spanning the period 2010Q3-2012Q3. This process is repeated until the last sample date
is reached. Updating the forecasting window is possible through a Kalman filter.30 The
forecasting properties of the model are assessed using the resulting collection of one to
eight steps ahead forecasting errors. We compute the Theils U statistic, the ratio of the
root mean squared error (RMSE) of our model and the RMSE of a random walk (naive)
model, as a forecasting performance measure.31
Tables (18) and (19) present forecasting performance. For default rate, models (a) to
(d) with macroeconomic variables have valid forecasting performance only for few quarters
ahead, except for model (a) where the inclusion of the spread between lending rate and
short rate improves forecasting capacity.32 On the other hand, model (e), the BVAR
with only financial variables have a good forecasting ability, especially at longer horizons.
Models (f) and (g) built with micro variables should only be interpreted with caution, given
the nature of interpolated data, obtained using splines and filtered to remove measurement
errors.33 Among the FAVAR models, (h) and (i), only the first one expresses sufficient
properties at all horizons, supporting the view of Corradi and Swanson (2014) about factor
loadings instability in presence of breaks. The TVAR model of Balke (2000) has the best
forecasting performance among the models, but only for the lower regime for the default
rate. Finally, the TVECM model has a short-term predictive capacity. For the ratio
between the stock of bad loans and total loans, the model (d) with macro and financial
variables, is comparable with the FAVAR models, that, especially for (h), exhibit adequate
forecasting performance. Except for model (j), both the TVECM and the ARMA (2,0)
models present good forecasting properties for the entire horizon.
Tables (18) and (19) present different models forecasting performance. Although our
30

ARMA models are updated through recursive regressions. See Table (17).
In this paper, we only concentrate on point forecasts and not on predictive density forecasts, as in
Amisano and Geweke (2013) and Clark and McCracken (2013), among others.
32
See, for example Sanjani (2014) on the properties of banking spreads in a DSGE model for US business
cycle.
33
Alternatively, mixed-frequency models could mitigate this drawback. See for example Foroni and
Marcellino (2013).
31

17

aim is not to find a theory for a small set of predictors for bad loans, we demonstrate that,
in a forecasting window characterizing recession, central banks should consider different
kinds of variables and models. Results suggest more emphasis on financial variables and
asset prices, and also a modeling strategy based on threshold models. Moreover, we think
that forecasting exercises like model combination, as in Amisano and Geweke (2013) could
be helpful. Finally, Figure (4) shows fan charts for selected models.

5.3

Conditional Forecasting

The analysis in the previous Section can be enhanced by conditioning upon future values of
endogenous variables through a scenario-based analysis. We adopt model (a), the BVAR
with Minnesota priors, with two lags, for: the spread between the lending rate for loans
with a maturity up to five years and the 3 month rate; CPI; real GDP; bank credit to non
financial sector and the indicator. We produce forecasts from 2014Q1 to 2018Q1 using
the above mentioned BVAR with Gibbs sampling from an inverse Wishart distribution by
using 60,000 draws, the first 10,000 of which were discarded.
Our model is conditioned on these adverse scenarios:
real GDP growth: reduction of .25% year over year;
real GDP growth: adverse scenario EBA. See ESRB (2014a);
CPI: reduction of .05% year over year;
CPI: adverse scenario EBA. See ESRB (2014a);
Bank credit to non financial sector: reduction of 2.00% year over year;
Lending spread: increase of 100 basis points year over year.
Figures (5) and (6) contain unconditional and conditional forecasts for default rate
and the ratio between the stock of bad loans over total loans. The negative scenario on
real GDP growth affects the default rate approximately after two years, with respect to
unconditional forecast, while the indicator reflecting the riskiness of banks credit portfolio
is more sensitive, with a reaction after one year. The negative path of inflation throughout
the forecasting horizon influences bad loans in both designed scenarios, with a persistent
impact on the second indicator. When we consider the adverse dynamics of bank specific
drivers, prices (the mark up) and quantities (bank credit to non financial sector), we
encounter a consistent upward movement of the two credit quality indicators. Price effects
boost bad loans immediately, with a peak after two years and a half for default rate
(reaching 1.5%), while there is a persistent increase for the other indicator. Quantities
effects, on the other hand, generate an increasing path after one year, reaching 1.4% at the
end of 2017, for default rates. Looking at the Figures, we confirm empirical evidence about
the lagged response of bad loans to movements in macroeconomic variables; moreover
lending specific features, like price and quantity, affect bad loans in a timely and consistent
18

manner. This evidence should be supported by a feedback effects analysis, presented in

the next Section.

Impulse Response Functions

In this last Section we further investigate the dynamics of Italian bad loans focusing on
an impulse response analysis from different models.34 First, we propose an overview of
the responses from model (a), and the detailed responses of default rate from model (e),
with financial variables only. Then, we study the Primiceri (2005) model with time varying
stochastic volatility, discussing different combinations of determinants for the default rate,
and finally the model of Balke (2000) with changes in regimes.35 All models are estimated
up to the end of our sample and contain two lags.
Figure (7) presents feedback effects from model (a), after imposing a Choleski decomposition to get orthogonalized impulse response functions, with variables ordered from
spread to default rate. As a first step, we focus on the causal link that goes from default
rate to the other variables in the system. The responses of the spread between lending
rate and the short rate to different shocks seem reasonable: positive macroeconomic and
credit conditions tend to reduce the riskiness of Italian firms, while an increase in the
default rate reinforces the negative assessment of credit quality. Also the CPI shows the
same reaction to positive macroeconomic and credit conditions, while it seems unaffected
by an increase in the default rate. The real GDP growth, however, moves in a different
way: a positive shock in bank credit and in the default rate generate unexpected reactions
of real GDP growth. In our opinion, this could reflect low cross-correlations with default
rate, as shown in Section (2). As a robustness check, we invert the order of real GDP with
CPI with similar results. We also substitute real GDP with unemployment rate obtaining
the expected theoretical reaction.36 Although model (a) may suffer from focusing only on
macroeconomic and credit determinants, and hence without banking, firms specific and
financial variables, we think that it is quite complete to describe macro-credit linkages. It
is possible to interpret the unexpected reaction of real GDP by looking at the bad performance of Italian economy since 2007: more than five years of persistent low and extremely
negative growth, during the crisis, may have weaken the dynamic link between supply side
of the credit market (quantity of credit, and, therefore, bad loans) and the gross domestic
product (our proposed demand side). Unemployment rate seems better reflecting how
34

Table (17) describes all the models. For brevity, we only present results for the default rate indicator.
Results for the other indicator are available from the author upon request.
35
We would like to thank Dimitris Koroblis for providing Matlab programs to perform the Primiceri
(2005) model. We refer to Primiceri (2005) and Koop and Korobilis (2010), among others, for a specific
and broad theoretical study on Bayesian inference and estimation for macroeconometric analysis.
36
This does not invalidate our scenario-based forecasting exercise which does not require an orthogonalization. Moreover, that was done to explain the causal link from determinants to default rate. However,
we also produce scenario-based forecasts with the same model conditioned on unemployment scenarios,
confirming the upward reaction in future default rates.

19

the supply side of the credit market affects the entire economy. Finally, the response of
banking variables to the shocks of all variables in the system goes in the expected direction, especially for default rate. Figure (8) shows, in particular, the negative reaction of
default rate after a shock in real GDP growth. Hence, the link between a positive macroeconomic shock and bad loans seems going in the expected direction. Figure (9), instead,
focuses on model (e) from Table (17), the one with financial variables and asset prices
only (forward looking variables): shocks to residential property prices (a possible proxy
for collateral), together with bank credit and stock returns produce a negative reaction
of the default rate. On the other hand, expectations on the Italian economy, implied in
the sovereign spread BTP versus Bund and in the slope of the term structure (long versus
short), provide an upward movement in bad loans.
We re-adapt the macroeconometric model of Primiceri (2005) for robustness, dealing
with impulse response functions with stochastic volatility. Figures (10) to (14) present
results for selected dates in our sample. The first four Figures allow us to focus on the
other side of the causal relationship, the impact of determinants on the default rate, while
the last one repeats the same study, although with short rate, real GDP and default
rate. Shocks in real GDP growth and CPI produce, respectively, a negative and a positive
reaction of default rate, confirming that better economic conditions are negatively related
with credit quality. Moreover, when we consider either short rate or the lending spread,
together with real GDP and default rate, we have a different reaction. On the one hand, a
shock in the 3-month rate produces a slight positive reaction of default rate throughout the
horizon, while, on the other, a positive shock on the lending spread generates an immediate
reaction, as expected. Finally, Figure (14) confirms the upward movement of real GDP
after a shock on default rate. Again, we test the same model with the unemployment rate
and obtain a positive response, as the theory suggests.
The last exercise studies the feedback effects from the Balke (2000) threshold model
with real GDP growth, short rate, bank credit and the default rate. Given the non linearity
of the model, we present generalized impulse response functions, to take care of different
dynamics in different regimes.37 Figures (15) and (16) show the responses of default rate
in the two regimes, while (17) and (18) those for output. When the default rate goes above
the specified threshold of 0.742, the model produces expected responses: for example, a two
standard deviation shock to output generates a reduction in default rate, lasting for two
years and a half; a two standard deviation shock in bank credit moves default rate down
through the first year. Figure (16) confirms the overall dynamics, but in the lower regime
all responses have a smaller magnitude. The responses of real GDP to different shocks,
conditioning on different regimes, also exhibit this feature. However, in the two regimes,
we also find the unexpected reaction of real GDP to a shock in default rate. On the other
hand, only in the lower regime a shock in bank credit generates a coherent movement of
real GDP. We can conclude that when Italian firms credit quality is considerably weak,
i.e. the default rate is above the threshold (upper regime), a possible breakdown in the
37

See Koop et al. (1996) for a detailed analysis of GIRF.

20

transmission of credit to the macroeconomy occurs, with a negative procyclical effect.

Hence, non-linear models could allow policy makers to extend their knowledge about
the link between credit and the macroeconomy, in particular, and about the monetary
transmission mechanism (bank lending channel), in general, during different regimes.

Concluding Remarks

Since 2009 credit conditions have been experiencing a dramatic worsening, reflecting the
two most severe recessions since the Great Depression. This paper studies bad loans for
Italian non financial firms during the last twenty years. Motivated by the existing literature
and based on exploratory statistical analysis, we propose different linear and non-linear
methodologies focusing on short and long-term determinants, forecasting properties and
dynamic responses.
For the determinants, we find that credit riskiness is affected by lagged values of
macroeconomic and financial environment, but also by specific lenders and borrowers
characteristics. Positive (negative) macroeconomic and financial conditions generate a
reduction (increase) in future bad loans. For bank specific variables, our evidence points
in the direction of bad management, skimping and moral hazard. Moreover, a
riskier, more financially constrained and low capitalized firm is expected to default, and,
therefore to stimulate bad loans over the banking system. Anxiety dummies from agents
(bankers and firms) surveys also reinforce our findings. Furthermore, non-linear analysis
confirm that when bad loans reach their critical value, determinants have a stronger effects
on future credit quality, which persist over time. Long-term non-linearities, in the form of
breaks, asymmetries and changes in regime also corroborate these findings.
Forecasting exercises demonstrate that models with different macroeconomic variables
perform best at shorer horizons, but those based on financial variables and factors extracted from a large dataset could perform better at all horizons. This could suggest
greater emphasis on linear models with financial variables and asset prices, but also nonlinear models, where regimes and endogenous estimates of thresholds could be helpful in a
macroprudential perspective. The stress test analysis confirms that future values of default rate are affected by adverse macroeconomic and financial scenarios, especially those
related to lending (price and quantity effect of credit).
Finally, findings from dynamic response analysis reveal two interesting points. A shock
in macroeconomic variables produces expected future reactions in default rates, supporting
our empirical evidence for the short-term. A positive shock in either bank credit or in
default rate do not generate clear evidence of a feedback effect from banking sector to
the real economy. This only happens when we consider the entire sample and when the
default rate is in the above regime. However, in tranquil times (lower regime for default
rate), real GDP has the expected theoretical behavior. We can conclude that when credit
quality is considerably weak, a possible breakdown in the transmission of credit to the
macroeconomy occurs, with a negative procyclical effect. Hence, non-linear models could

21

allow policy makers to extend their knowledge about the functioning of the link between
credit and the macroeconomy, in particular, and the monetary transmission mechanism
(bank lending channel), in general, during turbulent times.

22

References
[1] Albertazzi, U., T. Ropele, G. Sene and F. M. Signoretti, 2014, The Impact of sovereign
debt crisis on the activity of Italian banks, Journal of Banking & Finance, No. 46, pp.
387 - 402.
[2] Amisano, G. and J. Geweke, 2013, Prediction Using Several Macroeconomic Models,
ECB working paper, N.1537.
[3] Asea, P. K. and S. B. Brock, 1997, Lending Cycles, NBER Working Paper, No. 5951.
[4] Athanasoglou, P.P., S.N. Brissimis and M.D. Delis, 2008, Bank-specific, industryspecific and macroeconomic determinants of bank profitability, Journal of International Financial Markets, Instututions & Money, 18, 121-136.
[5] Balke, N. S., 2000, Credit and Economic Activity: Credit Regimes and Nonlinear
Propagation of Shocks, The Review of Economics and Statistics, 82(2), pp. 344 - 349.
[6] Balke, N. S. and T. B. Fomby, 1997, Threshold Cointegration, International Economic
Review, Vol. 38, No. 3, pp. 627 - 645, August.
[7] Bank of Italy, 2011, Centrale dei Rischi. Istruzioni per gli intermediari creditizi. 14o
Aggiornamento, 29 aprile 2011.
[8] Bank of Italy, 2013, The Recent Asset Quality Review on Non-Performing-Loans Conducted by the Bank of Italy: Main Features and Results. Technical document.
[9] Bank of Italy, Financial Stability Review. Various issues.
[10] Bank of Italy, 2014, Supplemento al Bollettino Statistico. Indicatori Monetari e Finanziari. Moneta e Banche. Ottobre. No. 51.
[11] Banque de France, 2014, Financial Stability Review, April. Macroprudential Policies:
Implementation and Interactions. No. 18
[12] Beck, R., P. Jakubk and A. Piloiu, 2013, Non-Performing Loans, What Matters in
Addition to the Economic Cycle?, ECB working paper, No. 1515.
[13] Beck, T., H. Degryse, R. De Haas and N. van Horen, 2014, When Arms Length is
Too Far. Relationship Banking over the Business Cycle, working paper.
[14] Behn, M., R. Haselmann and V. Vig, 2014, The Limits of Model-Based Regulation,
working paper.
[15] Belaid, F., 2014, Loan Quality Determinants: Evaluating the Contribution of BankSpecific Variables, Macroeconomic Factors and Firm Level Information, Graduate Institute of International and Development Studies, working paper, No. 04/2014.
23

[16] Berger, A. N. and R. DeYoung, 1997, Problem Loans and Cost Efficiency in Commercial Banks, Journal of Banking and Finance, Vol. 21.
[17] Bernanke, B. S., J. Boivin, P. Eliasz, 2004, Measuring the Effects of Monetary Policy:
a Factor-Augmented Vector Autoregressive (FAVAR) Approach, NBER working paper,
No. 10220.
[18] Bessler, W. and P. Kurmann, 2014, Bank Risk Factors and Changing Risk Exporures:
Capital Market Evidence Before and During the Crisis, Journal of Financial Stability,
Vol. 13, pp. 151 - 166.
[19] Bofondi, M. and T. Ropele, 2011, Macroeconomic Determinants of Bad Loans: Evidence from Italian banks, Bank of Italy Occasional Papers, No. 89.
[20] J.R. Booth and L.C. Booth, 2006, Loan Collateral Decisions and Corporate Borrowing
Costs, Journal of Money Credit and Banking, Vol. 38, No. 1.
[21] Borio, C., C. Furfine and P. Lowe, 2001, Procyclicality of the Financial System and
Financial Stability: Issues and Policy Options, BIS papers, No. 1.
[22] Carboni. A and A. Carboni, 2013, Alcune Note sulle Determinanti dei Non-Performing
Loans. mimeo.
[23] Claessens, S. and M. A. Kose, 2014, Financial Crisis: Explanations, Types, and Implications, in Financial Crises: Causes, Consequences, and Policy Responses, Edited
by S. Claessens, M. A. Kose, L. Laeven, and Fabian Valencia, International Monetary
Fund.
[24] Clark, T. E. and M. W. McCracken, 2013, Evaluating the Accuracy of Forecasts
from Vector Autoregressions, Federal Reserve Bank of St. Louis, working paper, No.
2013-010A.
[25] Cure, B., 2012, The Monetary Policy of the European Central Bank, Barclays
European Conference, Tokyo, 26 March 2012.
[26] Corradi, V. and N. R. Swanson, 2014, Testing for Structural Stability of Factor Augmented Forecasting odels, Journal of Econometrics, N. 182, pp. 100 - 118.
[27] De Mitri, S., G. Gobbi and E. Sette, 2010, Relationship Lending in a Financial
Turmoil, Bank of Italy working paper, No. 772.
[28] DellAriccia, G., D. Igan, L. Laeven and H. Tong, 2014, Policies for Macrofinancial
Stability: Dealing with Credit Booms and Busts, in Financial Crises: Causes, Consequences, and Policy Responses, Edited by S. Claessens, M. A. Kose, L. Laeven, and
Fabian Valencia, International Monetary Fund.

24

[29] Delis, M. D., G. P. Kouretas and C. Tsoumas, 2014, Anxious Periods and Bank
Lending, Journal of Banking & Finance, No. 38, pp. 1 - 13.
[30] Dickey, D. A. and W. A. Fuller, 1979, Distribution of the Estimators for the Autoregressive Time Series with a Unit Root, Journal of the American Statistical Association,
N. 74, pp. 427 - 431.
[31] Doan, T., 2010, RATS Version 8, Users Guide, ESTIMA.
[32] Doan, T., R. B. Litterman and C. A. Sims, 1984, Forecasting and Conditional Projection Using Realistic Prior Distributions, Econometric Reviews, Vol. 3, No. 1, pp. 1
- 100.
[33] Duffie, D. and K.J. Singleton, 2003. Credit risk, Pricing, Measurement and Management, Princeton Series in Finance.
[34] Elliott, G., T. Rothenberg and J. Stock, 1996, Efficient Tests for an Autoregressive
Unit Root, Econometrica, Vol.(64), pp. 813 - 836.
[35] Enders, W. and C. W. J. Granger, 1998, Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates, Journal of Business
& Economic Statistics, Vol. 16, No. 3, pp. 304 - 311.
[36] Enders, W. and P. L. Siklos, 2001, Cointegration and Threshold Adjustment,Journal
of Business & Economic Statistics, Vol. 19, No. 2, pp. 166 - 176.
[37] European Banking Authority, 2014, Main features of the 2014 EU-wide stress test.
[38] European Central Bank, The Euro Area Bank Lending Survey. Various issues.
[39] European Central Bank, 2014, Aggregate Report on the Comprehensive Assessment.
[40] European System of Central Banks, 2014, Report on the Macro-prudential Research
Network (MARs), 20 June 2014.
[41] European Systemic Risk Board, 2014a, EBA/SSM stress test: The Macroeconomic
Adverse Scenario. 17 April 2014.
[42] European Systemic Risk Board, 2014b, Is Europe Overbanked? Reports of the Advisory Scientific Committee, No. 4, June 2014.
[43] Fiori, R. and S. Iannotti, 2010, On the Interaction between Market and Credit Risk:
a Factor-Augmented Vector Autoregressive (FAVAR) Approach, Bank of Italy working
paper, No. 779.
[44] Fiori, R., A. Foglia and S. Iannotti, 2009, Beyond Macroeconomic Risk: The Role
of Contagion in the Italian Corporate Default Correlation, Carefin working paper, No.
12/09.
25

[45] Freixas, X. and J-C. Rochet, 2008, Microeconomics of Banking, Second Edition, MIT
Press.
[46] Foroni, C. and M. Marcellino, 2013, A Survey of Econometric Methods for MixedFrequency Data, EUI working paper, ECO 2013/02.
[47] Fostel, A and J. Geanakoplos, 2008, Leverage Cycles and the Anxious Economy,
American Economic Review, 98:4, pp. 1211 - 1244.
[48] M. Franta, 2013, The Effect of Non-Linearity Between Credit Conditions and Economic Activity on Density Forecasts, Czech National Bank working paper, N. 9.
[49] Gambacorta, L. and P. E. Mistrulli, 2014, Bank Heterogeneity and Interest Rate
Setting: What Lessons Have We Learned since Lehman Brothers?, Journal of Money,
Credit and Banking, Vol. 46, No. 4, pp. 753 - 778.
[50] Gambera, M., 2000, Simple Forecast of Bank Loan Quality in the Business Cycle, Emerging Issues Series, Supervision and Regulation Department, Federal Reserve
Bank of Chicago.
[51] Gasha, J. G. and R. A. Morales, 2004, Identifying Threshold Effects in Credit Risk
Stess Testing, IMF working paper, N. 150.
[52] S. Ghosh, 2005, Does Leverage influence banks non-performing loans? Evidence from
India, Applied Economic Letters, 12, pg 913-918.
[53] J. D. Hamilton, 1989, A New Approach to the Economic Analysis of Nonstationary
Time Series and the Business Cycle, Econometrica, Vol. 57, 357-384.
[54] J. D. Hamilton, 1994, Time Series Analysis, Princeton University Press.
[55] Hansen, B. E. and B. Seo, 2002, Testing for rwo-regime threshold cointegration in
vector error-correction models, Journal of Econometrics, Vol. 110, pp. 293 - 318.
[56] Hoggart, G., S. Sorensen and L. Zicchino, 2005, Stress Tests of UK Banks using a
VAR Approach, Bank of England working paper, No. 282.
[57] Jakubk, P. and C. Schmeider, 2008, Stress Testing Credit Risk: Comparison of the
Czech Republic and Germany, Financial Stability Institute working paper. FSI Award
2008 winning paper.
[58] Jimenez, G. and J. Saurina, 2004, Collateral, Type of Lender and Relationship Banking as Determinants of Credit Risk, Journal of Banking & Finance, Vol. 28, pp. 2191
- 2212.
[59] Jimenez, G. and J. Saurina, 2006, Credit Cycle, Credit Risk and Prudential Regulation, International Journal of Central Banking, Vol. 2, No. 2, pp. 66 - 98.
26

[60] Jimenez, G., V. Salas and J. Saurina, 2004, Determinans of Collateral, Bank of Spain
working paper, No. 0420.
[61] Jimenez, G., S. Ongena, J. L. Peydro and J. Saurina, 2013, Macroprudential Policy,
Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish
Dynamic Provisioning Experiments, Working paper.
[62] Jimenez, G., S. Ongena, J. L. Peydro and J. Saurina, 2014, Hazardous Times for
Monetary Policy: What do Twenty-Three Million Bank Loans say about the Effects
of Monetary Policy on Credit Risk?, Econometrica, 82 (2), pp. 463 - 505.
[63] Johansen, S., 1988, Statistical Analysis of Cointegration Vectors, Journal of Economic
Dynamics and Control, Vol. 12, 231-254.
[64] Johansen, S., 1991, Estimation and Hypothesis Testing of Cointegration Vectors in
Gaussian Vector Autoregressive Models, Econometrica, Vol. 59, 1551-80.
[65] Juselius, K., 2006, The Cointegrated VAR Model: Methodology and Applications,
Advanced Texts in Econometrics. Oxford University Press.
[66] Karlsson, S., 2013, Forecasting with Bayesian Vector Autoregression, in Handbook of
Economic Forecasting, Vol. 2B, Edited by G. Elliott and A. Timmermann. Elsevier,
North Holland.
[67] W. R. Keeton , 1999, Does Faster Loan Growth Lead to Higher Loan Losses?, Federal
Reserve Bank of Kansas City, Economic Review, second quarter.
[68] Klein, N., 2013, Non-Performing Loans in CESEE: Determinants and Impact on
Macroeconomic Performance, IMF working paper, No. 13/72.
[69] Koop, G. and Korobilis, D., 2010, Bayesian Multivariate Time Series Methods for
Empirical Macroeconomics. Foundations and Trends in Econometrics, Vol.3, No.4,
267-358.
[70] Kwiatkowski, D., P.C.B Phillips, P. Schmidt and Y. Shin, 1992, Testing the Null
Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure are we
that Economic Time Series Have a Unit Root?, Journal of Econometrics, Vol. 54(1-3),
pp. 159 - 178.
[71] Lee, J. and M.C. Strazicich, 2003, Minimum Lagrange Multiplier Unit Root Test
with Two Structural Breaks, Review of Economics and Statistics, Vol. 84(4), pp. 1082
- 1089.
[72] Litterman, R. B., 1986, Forecasting With Bayesian Vector Autoregressions - Five
Years of Experience, Journal of Business & Economic Statistics, Vol. 4, No. 1, pp. 25
- 38.
27

[73] Louzis, D.P., A.T. Voludis and V.L. Metaxas, 2010, Macroeconomic and banking specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios, Bank of Greece working paper, No. 118.
[74] Marcucci, J. and M. Quagliariello, 2006, Is Bank Portfolio Riskiness Procyclical:
Evidence from Italy using a Vector Autoregression, Journal of International Financial
Markets, Institutions & Money, 18, pp. 46 - 63.
[75] Marcucci, J. and M. Quagliariello, 2008, Credit Risk and Business Cycle over Different
Regimes, Bank of Italy working paper, No. 670.
[76] Mendoza, J. and M. E. Terrones, 2012, An Anatomy of Credit Booms: Evidence from
Macro Aggregates and Firm Level Data, working paper. Presented at the Financial
Cycles, Liquidity, and Securitization Conference, hosted by IMF.
[77] Murto, R. 1994, Finnish Banking Crisis: Can We Blame Bank Management?, Finnish
economic papers, Vol. 7, No. 1, Spring.
[78] Nkusu, M., 2011, Nonperforming Loans and Macrofinancial Vulnerabilities in Advanced Economies, IMF working paper, No. 11/161.
[79] Perron, P., 1990, Testing for a Unit Root in a Time Series with a Changing Mean,
Journal of Business & Economic Statistics, Vol. 8(2), pp. 153 - 162.
[80] Perron, P., 2006, Dealing with Structural Breaks, in Palgrave Handbook of Econometrics, Vol. 1: Econometric Theory.
[81] Primiceri, G. E., 2005, Time Varying Structural Vector Autoregressions and Monetary
Policy, Review of Economic Studies, No. 72, pp. 821 - 852.
[82] Puri, M., J. Rocholl and S. Steffen, 2011, Global Retail Lending in the Aftermath of
the US Financial Crisis: Distinguishing Between Supply and Demand Effects, Journal
of Financial Economics, Vol. 100, pp. 556 - 578.
[83] Quagliariello, M., 2004, Banks Performance over the Business Cycle: A Panel Analysis
on Italian Intermediaries,University of York discussion paper, No. 2004/17.
[84] Quagliariello, M., 2009, Stress-Testing the Banking System, Methodologies and Applications, Cambridge University Press.
[85] Rinaldi, L. and A. Sanchis-Arellano, 2006, Household Debt Sustainability. What Explains Household Non-Performing Loans? An Empirical Analysis, ECB working paper,
No. 570.
[86] Salas, V. and J. Saurina, 2002, Credit Risk in Two Institutional Regimes: Spanish
Commercial and Savings Banks, Journal of Financial Services Research, 22:3, pp. 203
- 224.
28

[87] Sanjani, M. T., 2014, Financial Frictions and Sources of Business Cycle, IMF working
paper, No. 14/194.
[88] D. Serwa, 2011, Identifying Multiple Regimes in a Model of Credit to Households,
National Bank of Poland working paper, No. 99.
[89] D. Serwa, 2013, Measuring Non-Performing Loans During (and After) Credit Booms,
Central European Journal of Economic Modelling and Econometrics, No. 5, pp. 163 183.
[90] R.L. Shockley, 1995, Bank Loan Commitments and Corporate Leverage, Journal of
Financial Intermediation, Vol. 4, pg. 272-301.
[91] Sims, C. A., J. H. Stock and M. W. Watson, 1990, Inference in Linear Time Series
Models with Some Unit Roots, Econometrica, Vol. 58, No. 1, pp. 113 - 44.
[92] Smets, F., 2013, Financial Stability and Monetary Policy: How Closely interlinked?,
prepared for the Riksbank Conference: Two Decades of Inflation Targeting: Main
Lessons and Remaining Challenges. Stockholm.
[93] Stock, J. H. and M. W. Watson, 1993, A Simple Estimator of Cointegrating Vectors
in Higher-Order Integrated Systems, Econometrica, Vol. 61, No. 4, pp. 783 - 820.
[94] Stock J. H. and M. W. Watson, 1999, Business Cycles Fluctuations in U.S. Macroeconomic Time Series, in J.B. Taylor and M. Woodford (Eds), Handbook of Macroeconomics, Vol. 1A, (New York: North-Holland), pp. 3 - 64.
[95] Stock, J. and M. Watson, 2002, Macroeconomic Forecasting Using Diffusion Indexes,
Journal of Business & Economic Statistics, Vol. 20 No. 2, pp. 147-162.
[96] T. Ter
asvirta, 1994, Specification, Estimation and Evaluation of Smooth Transition
Autoregressive Models, Journal of American Statistical Association, Vol. 89, pp. 208218.
[97] T. Ter
asvirta, 2006, Forecasting Economic Variables with Nonlinear Models, in Handbook of Economic Forecasting, Vol. I, Edited by G. Elliott, C. W. J. Granger and A.
Timmermann. Elsevier, North Holland.
[98] Tong, H., 1983, Threshold Models in Non-linear Time Series Analysis, Lecture Notes
in Statistics. Springer-Verlag.
[99] Tsay, R. S., 1998, Testing and Modeling Multivariate Threshold Models, University
of Chicago working paper.
[100] Zivot, E. and D. W. K. Andrews, 1992, Further Evidence on the Great Crash, the
Oil-Price Shock, and the Unit-Root, Journal of Business & Economic Statistics, Vol.
10(3), pp. 251 - 270. Hypothesis

29

Tables
Variable

Min

25th %-tile

Median
1.069
1.028
0.952
1.170
-0.650
2.400
7.100
110.631
-3.060
100.383

75th %-tile
Macroeconomic
1.968
1.854
3.541
4.776
1.200
3.300
8.300
118.272
-1.500
106.842

Max

Mean

St. Dev.

Skewness

Kurtosis

4.130
4.890
9.896
20.996
3.870
5.700
10.500
135.827
7.412
119.633

0.647
0.578
-0.182
0.240
-0.458
2.687
7.311
112.224
-3.959
100.036

2.134
2.045
5.360
9.052
1.987
1.298
1.392
10.999
3.959
10.030

-1.211
-0.665
-0.714
-0.789
0.212
0.632
0.369
-0.503
-0.608
-0.354

2.206
0.161
0.023
2.018
-0.919
-0.119
-0.322
1.856
1.087
-0.367

3.867
0.525
0.482
4.523
6.197
1.673
0.247
1.766
5.717

24.599
4.050
4.395
3.701
2.968
1.543
27.601
1.868
4.207

-0.466
0.419
0.310
1.064
1.391
0.335
0.223
0.990
-0.395

0.412
3.457
-0.360
0.557
0.553
-0.106
0.272
-0.354
-0.276

14.705
12.234
3.962
0.698
1.410
18.007
0.839

12.040
5.036
2.927
0.622
0.671
12.875
0.588

1.474
5.243
0.746
0.040
0.285
1.848
0.105

-0.664
-0.821
-0.434
0.108
0.802
1.340
0.847

-0.359
-0.164
-1.383
-0.858
0.295
0.496
-0.412

7.793
7.427

5.462
5.046

1.357
1.067

-0.779
0.548

-0.133
-1.075

Real GDP
Private Cons.
Investments
Durable Cons.
CA to GDP
CPI
Unempl. Rate
Debt to GDP
Deficit to GDP
ESI

-6.904
-4.514
-13.618
-31.473
-4.020
0.100
4.800
75.143
-15.745
77.867

-0.286
-0.277
-3.292
-3.745
-2.050
1.825
6.400
106.475
-6.090
94.742

Stock index
REER
Res. Prop. Prices
Short Rate
Long Rate
Slope
Vol. Eurexx
Spread ITA vs GER
Bank Credit to NFS

-64.864
-13.579
-7.770
0.200
3.090
-2.620
-66.769
0.140
-4.044

-8.083
-1.840
-2.620
2.065
4.273
0.453
-17.945
0.260
3.146

Financial and Asset Prices

9.443
18.295
66.218
0.700
1.956
15.608
0.110
3.560
10.710
3.445
6.710
16.430
4.825
6.585
13.850
1.495
2.763
5.330
-4.992
20.161
83.566
0.850
3.018
6.450
6.272
8.553
15.049

Leverage
ROE
ROA
Oper. costs / Income
LLP / Loans
Capital / Loans
Int. Margin /
Gross Margin
Liquidity Ratio
Funding Ratio

8.729
-7.020
1.777
0.544
0.265
11.046
0.427

11.524
2.187
2.086
0.595
0.510
11.601
0.520

12.532
6.843
3.196
0.610
0.612
12.298
0.552

2.599
3.631

5.001
4.244

5.932
4.575

ROE
ROA
Int. Costs / EBITDA
Leverage
Structure
Capitalization

-12.957
2.714
0.133
0.270
0.898
0.255

2.939
3.797
0.193
0.312
0.962
0.324

Non Financial Firms

5.759
8.941
13.949
4.398
5.169
6.197
0.253
0.295
0.530
0.343
0.354
0.455
1.035
1.059
1.111
0.369
0.380
0.405

5.111
4.414
0.260
0.344
1.010
0.353

5.796
0.908
0.096
0.047
0.059
0.040

-1.200
-0.197
1.220
0.677
-0.195
-0.942

1.809
-0.832
1.331
0.045
-1.284
-0.256

Default Rate
Bad Loans / Loans

0.252
3.320

0.380
5.061

Credit Quality Indicators

0.628
0.823
1.447
5.900
8.670
14.526

0.664
6.970

0.307
2.706

0.610
0.920

-0.489
0.110

Lending rate < 5y

Lending rate > 5y
Lending rate avg.
Deposit Rate
Spread < 5y
Spread > 5y

2.734
2.686
3.071
0.601
0.229
0.372

3.755
3.522
3.979
0.939
1.370
1.490

5.485
5.518
6.020
2.039
1.943
1.976

2.496
2.596
2.767
1.604
0.740
0.643

1.209
1.096
1.321
1.629
0.306
0.099

0.448
0.255
0.796
1.587
-0.480
-0.298

Banking
12.887
9.257
3.530
0.655
0.816
12.681
0.679
6.354
5.932

Bank Lending
4.920
5.033
5.370
1.462
1.895
1.932

Rates and Spreads

5.938
11.595
6.082
11.738
6.534
13.064
2.255
6.447
2.408
3.494
2.495
3.467

Table 1: Descriptive statistics on selected variables. Lending rate < / > 5y is the lending rate for non financial firms on a loan with
a maturity below or above five years, respectively. Spread is the spread between the lending rate for non financial firms and the
short rate. The same holds for < / > 5y definitions. Stock index and Vol. Eurexx are measured with annualized returns.

30

31

Real GDP
Private Cons.
Investments
CPI
ULC
Unemployment Rate
Debt to GDP
Deficit to GDP
CA to GDP
ESI
Stock index
Slope
Short Rate
Long Rate
Spread BTP vs Bund
M3
Res. Prop. Prices
Bank Credit to NFS
Leverage banks
ROE banks
ROA banks
Oper. costs / income
LLP / loans
Capital / loans
Int. Margin / Gross Margin
Liquidity Ratio
Funding Ratio
ROE firms
ROA firms
Int. Exp. / EBITDA firms
Leverage firms
Capitalization firms

7
-0.16
-0.25
-0.32
0.50
0.02
0.03
0.03
-0.23
0.02
-0.38
-0.10
0.12
0.40
0.56
0.71
-0.34
-0.27
-0.17
-0.42
-0.61
-0.47
0.59
0.19
0.54
0.52
-0.16
0.04
-0.52
-0.39
0.67
0.69
-0.60

6
-0.19
-0.27
-0.34
0.52
0.05
0.10
0.04
-0.18
0.10
-0.42
-0.10
0.14
0.43
0.61
0.76
-0.35
-0.27
-0.23
-0.39
-0.62
-0.47
0.62
0.26
0.55
0.56
-0.22
0.05
-0.55
-0.42
0.71
0.73
-0.65

5
-0.23
-0.31
-0.37
0.54
0.06
0.15
0.05
-0.31
0.16
-0.47
-0.11
0.13
0.48
0.67
0.83
-0.36
-0.28
-0.27
-0.37
-0.62
-0.44
0.62
0.38
0.56
0.61
-0.31
0.04
-0.58
-0.45
0.74
0.76
-0.70

4
-0.27
-0.35
-0.40
0.54
0.09
0.24
0.10
-0.22
0.23
-0.52
-0.09
0.16
0.48
0.68
0.85
-0.38
-0.33
-0.33
-0.30
-0.61
-0.43
0.59
0.46
0.54
0.62
-0.38
0.04
-0.61
-0.45
0.75
0.77
-0.74

3
-0.30
-0.40
-0.44
0.49
0.02
0.32
0.20
-0.34
0.29
-0.53
-0.04
0.17
0.46
0.66
0.84
-0.40
-0.41
-0.39
-0.29
-0.61
-0.41
0.54
0.55
0.56
0.59
-0.44
0.04
-0.61
-0.43
0.72
0.76
-0.76

2
-0.29
-0.40
-0.43
0.45
-0.01
0.40
0.29
-0.17
0.42
-0.53
0.03
0.18
0.43
0.63
0.81
-0.43
-0.46
-0.46
-0.24
-0.63
-0.38
0.50
0.67
0.56
0.56
-0.50
0.06
-0.60
-0.41
0.68
0.74
-0.77

1
-0.25
-0.34
-0.39
0.39
-0.04
0.48
0.33
-0.26
0.49
-0.47
0.14
0.18
0.39
0.58
0.74
-0.44
-0.51
-0.51
-0.25
-0.65
-0.33
0.46
0.75
0.59
0.52
-0.56
0.09
-0.58
-0.38
0.63
0.70
-0.76

0
-0.17
-0.28
-0.31
0.32
-0.14
0.55
0.38
-0.18
0.57
-0.39
0.24
0.17
0.36
0.53
0.68
-0.48
-0.55
-0.56
-0.19
-0.66
-0.28
0.44
0.86
0.59
0.49
-0.65
0.18
-0.53
-0.34
0.55
0.65
-0.73

-1
-0.07
-0.15
-0.20
0.28
-0.19
0.58
0.40
-0.32
0.59
-0.28
0.33
0.15
0.34
0.50
0.60
-0.50
-0.56
-0.56
-0.20
-0.57
-0.20
0.44
0.73
0.59
0.49
-0.65
0.23
-0.45
-0.27
0.45
0.59
-0.71

-2
0.03
-0.05
-0.09
0.25
-0.25
0.60
0.41
-0.24
0.65
-0.16
0.39
0.14
0.33
0.48
0.55
-0.52
-0.55
-0.53
-0.17
-0.49
-0.13
0.46
0.68
0.56
0.50
-0.62
0.25
-0.37
-0.18
0.36
0.52
-0.67

-3
0.14
0.05
0.02
0.25
-0.30
0.59
0.41
-0.28
0.66
-0.03
0.37
0.12
0.35
0.49
0.52
-0.52
-0.52
-0.48
-0.13
-0.41
-0.05
0.48
0.62
0.50
0.51
-0.62
0.27
-0.29
-0.07
0.27
0.46
-0.64

-4
0.20
0.15
0.10
0.26
-0.29
0.59
0.39
-0.16
0.64
0.06
0.36
0.07
0.36
0.49
0.50
-0.50
-0.48
-0.42
-0.06
-0.35
0.01
0.49
0.57
0.43
0.52
-0.61
0.31
-0.22
0.03
0.18
0.40
-0.60

-5
0.26
0.19
0.19
0.29
-0.26
0.56
0.40
-0.26
0.63
0.14
0.32
0.03
0.39
0.50
0.48
-0.46
-0.42
-0.35
-0.03
-0.28
0.07
0.49
0.51
0.38
0.53
-0.59
0.36
-0.17
0.13
0.13
0.35
-0.58

-6
0.30
0.25
0.25
0.31
-0.24
0.54
0.38
-0.05
0.65
0.16
0.26
-0.01
0.41
0.51
0.47
-0.40
-0.36
-0.28
0.02
-0.24
0.12
0.46
0.48
0.32
0.53
-0.56
0.38
-0.14
0.19
0.09
0.29
-0.56

-7
0.31
0.27
0.30
0.35
-0.19
0.52
0.36
-0.12
0.66
0.18
0.26
-0.07
0.43
0.50
0.44
-0.33
-0.32
-0.24
0.06
-0.18
0.18
0.41
0.45
0.25
0.51
-0.55
0.41
-0.12
0.22
0.06
0.25
-0.54

Table 2: Cross-correlation between default rate and selected variables. See the Appendix. corr(xt , yt+k ) is the correlation between the series xt and our target variable default
rate yt+k , k quarters ahead. Hence, xt is leading, coincident or lagging with respect to yt+k for the highest correlation, corresponding to positive, null or negative k. In bold,
values |0.30|. In yellow the highest value.

8
-0.12
-0.24
-0.31
0.43
-0.02
0.00
0.05
-0.24
0.00
-0.34
-0.09
0.13
0.34
0.49
0.64
-0.35
-0.29
-0.14
-0.41
-0.58
-0.48
0.53
0.14
0.50
0.44
-0.09
0.02
-0.48
-0.34
0.62
0.64
-0.53

Series / k =

Cross correlation Default Rate (corr(xt , yt+k ))

-8
0.32
0.26
0.32
0.37
-0.16
0.52
0.31
-0.01
0.68
0.17
0.25
-0.12
0.44
0.48
0.41
-0.25
-0.27
-0.22
0.12
-0.12
0.22
0.34
0.41
0.19
0.49
-0.52
0.40
-0.12
0.23
0.03
0.20
-0.51

32

Real GDP
Private Cons.
Investments
CPI
ULC
Unemployment Rate
Debt to GDP
Deficit to GDP
CA to GDP
ESI
Stock index
Slope
Short Rate
Long Rate
Spread BTP vs Bund
M3
Res. Prop. Prices
Bank Credit to NFS
Leverage banks
ROE banks
ROA banks
Oper. costs / income
LLP / loans
Capital / loans
Int. Margin / Gross Margin
Liquidity Ratio
Funding Ratio
ROE firms
ROA firms
Int. Exp. / EBITDA firms
Leverage firms
Capitalization firms

7
-0.29
-0.37
-0.37
0.12
-0.24
0.43
0.54
-0.10
0.07
-0.41
-0.13
0.61
-0.42
0.40
0.69
-0.60
-0.48
-0.41
-0.50
-0.56
-0.36
0.53
0.34
0.58
0.17
-0.43
0.02
-0.28
-0.42
0.25
0.32
-0.52

6
-0.29
-0.39
-0.34
0.11
-0.25
0.52
0.58
-0.07
0.18
-0.42
-0.04
0.62
-0.44
0.36
0.69
-0.59
-0.52
-0.47
-0.45
-0.52
-0.32
0.48
0.42
0.57
0.16
-0.52
0.02
-0.24
-0.41
0.21
0.27
-0.55

5
-0.26
-0.38
-0.30
0.06
-0.28
0.61
0.61
-0.02
0.30
-0.41
0.05
0.61
-0.45
0.32
0.66
-0.59
-0.56
-0.50
-0.42
-0.46
-0.27
0.40
0.49
0.58
0.13
-0.60
0.03
-0.19
-0.41
0.17
0.21
-0.56

4
-0.23
-0.36
-0.24
-0.02
-0.32
0.70
0.64
-0.06
0.39
-0.39
0.14
0.58
-0.44
0.27
0.63
-0.58
-0.59
-0.52
-0.39
-0.42
-0.21
0.31
0.57
0.58
0.08
-0.67
0.05
-0.14
-0.39
0.13
0.15
-0.57

3
-0.19
-0.30
-0.18
-0.11
-0.36
0.77
0.66
0.00
0.49
-0.32
0.23
0.56
-0.43
0.24
0.58
-0.57
-0.59
-0.52
-0.36
-0.39
-0.15
0.21
0.64
0.59
0.01
-0.72
0.08
-0.09
-0.38
0.09
0.07
-0.56

2
-0.12
-0.22
-0.10
-0.19
-0.40
0.84
0.68
0.02
0.59
-0.24
0.33
0.51
-0.40
0.21
0.53
-0.56
-0.58
-0.52
-0.34
-0.37
-0.09
0.10
0.70
0.59
-0.06
-0.76
0.11
-0.05
-0.36
0.05
0.00
-0.54

1
-0.04
-0.13
0.00
-0.26
-0.46
0.89
0.68
0.08
0.70
-0.13
0.41
0.44
-0.36
0.15
0.46
-0.54
-0.56
-0.51
-0.33
-0.35
-0.02
0.00
0.75
0.61
-0.12
-0.80
0.15
-0.03
-0.34
0.01
-0.08
-0.51

0
0.04
-0.03
0.09
-0.30
-0.50
0.93
0.68
0.05
0.78
-0.03
0.49
0.35
-0.30
0.08
0.38
-0.51
-0.53
-0.48
-0.32
-0.32
0.05
-0.11
0.80
0.62
-0.17
-0.83
0.19
-0.01
-0.31
-0.03
-0.16
-0.47

-1
0.11
0.02
0.15
-0.23
-0.43
0.84
0.55
0.16
0.72
0.03
0.43
0.27
-0.22
0.09
0.30
-0.41
-0.42
-0.36
-0.25
-0.20
0.15
-0.20
0.69
0.51
-0.19
-0.74
0.21
0.05
-0.25
-0.11
-0.27
-0.34

-2
0.15
0.06
0.20
-0.17
-0.33
0.75
0.44
0.14
0.66
0.09
0.37
0.20
-0.14
0.12
0.22
-0.31
-0.32
-0.24
-0.17
-0.10
0.23
-0.28
0.60
0.41
-0.20
-0.67
0.24
0.08
-0.21
-0.17
-0.35
-0.22

-3
0.21
0.08
0.26
-0.10
-0.26
0.66
0.33
0.14
0.62
0.14
0.32
0.14
-0.06
0.17
0.15
-0.21
-0.22
-0.14
-0.09
0.00
0.31
-0.36
0.52
0.31
-0.20
-0.60
0.26
0.09
-0.16
-0.21
-0.41
-0.12

-4
0.24
0.10
0.29
-0.04
-0.22
0.58
0.24
0.18
0.59
0.20
0.28
0.07
0.03
0.22
0.08
-0.12
-0.13
-0.06
-0.01
0.08
0.38
-0.44
0.44
0.21
-0.19
-0.53
0.27
0.07
-0.13
-0.23
-0.44
-0.03

-5
0.26
0.11
0.32
0.01
-0.18
0.50
0.14
0.16
0.55
0.26
0.25
0.00
0.11
0.26
0.01
-0.03
-0.04
0.00
0.06
0.15
0.44
-0.53
0.36
0.12
-0.18
-0.47
0.29
0.02
-0.09
-0.25
-0.45
0.05

-6
0.28
0.13
0.34
0.04
-0.15
0.42
0.05
0.16
0.52
0.31
0.23
-0.08
0.19
0.26
-0.06
0.05
0.05
0.04
0.13
0.22
0.49
-0.60
0.29
0.03
-0.15
-0.40
0.30
-0.04
-0.05
-0.26
-0.44
0.10

-7
0.28
0.14
0.35
0.05
-0.09
0.35
-0.02
0.14
0.49
0.34
0.19
-0.15
0.25
0.25
-0.12
0.12
0.14
0.08
0.18
0.27
0.53
-0.64
0.23
-0.04
-0.12
-0.33
0.31
-0.10
0.00
-0.26
-0.40
0.14

Table 3: Cross-correlation between credit quality indicator and selected variables. See the Appendix. corr(xt , yt+k ) is the correlation between the series xt and our target
variable credit quality indicator yt+k , k quarters ahead. Hence, xt is leading, coincident or lagging with respect to yt+k for the highest correlation, corresponding to positive,
null or negative k. In bold, values |0.30|. In yellow the highest value.

8
-0.28
-0.32
-0.36
0.09
-0.21
0.35
0.51
-0.13
-0.04
-0.37
-0.19
0.57
-0.39
0.37
0.64
-0.60
-0.46
-0.36
-0.54
-0.59
-0.40
0.56
0.28
0.58
0.17
-0.32
0.03
-0.30
-0.42
0.28
0.36
-0.48

Series / k =

Cross correlation Credit Quality Indicator (corr(xt , yt+k ))

-8
0.27
0.15
0.35
0.06
-0.06
0.28
-0.09
0.14
0.45
0.34
0.14
-0.21
0.30
0.21
-0.18
0.17
0.21
0.10
0.23
0.31
0.56
-0.66
0.18
-0.11
-0.07
-0.28
0.32
-0.15
0.04
-0.28
-0.36
0.15

33

Real GDP
Private Cons.
Investments
CPI
CA to GDP
ULC
Unemployment Rate
Debt to GDP
Deficit to GDP
Durable Consumption
Stock index
Res. Prop. Prices
REER
M3
Short Rate
Long Rate
Slope
Spread BTP vs Bund
Bank Credit to NFS
Leverage banks
ROE banks
ROA banks
Oper. Costs / income
LLP / loans
Capital / loans
Int. Margin / Gross Margin
Liquidity Ratio
Funding Ratio
ROE firms
ROA firms
Int. Exp. / EBITDA firms
Leverage firms
Capitalization firms

KPSS
0.647552**
0.701063**
0.467641**
1.159518***
0.988186***
0.067852
0.279116
0.473421**
0.445207*
0.318231
0.346144
0.417422*
0.045570
0.383652*
1.819567***
1.510272***
1.067320***
0.667676**
0.374845*
1.657748***
0.780727***
1.658190***
0.361592*
0.400638*
1.111880***
1.747804***
1.012586***
1.529605***
0.571646**
0.477865**
0.490927**
0.708842**
1.459670***

-1.213
-2.239**
-2.564**
-0.282
-1.008
-2.592***
-1.165
0.578
-7.634***
-3.025***
-3.314***
-1.091
-1.712*
-1.019
-0.351
0.257
-2.249**
-0.625
-0.516
0.588
-1.238
0.094
-1.694*
-0.824
1.389
-0.449
-0.545
-0.842
-1.152
-0.847
-1.230
-2.020**
-1.173

DF-GLS

TEST
ADF
KPSS
DFGLS
LS (T-STAT)
Zivot-Andrews
Perron - M/C/J/B

ADDITIONAL INFO
Dickey and Fuller (1979)
Kwiatkowski et al. (1992)
Elliott et al. (1996)
Lee and Strazicich (2003)
Zivot and Andrews (1992)
Perron (2006)

DEFAULT RATE
-1.97080
0.668165**
-1.835*
-4.8887
1998:03
2008:04
-2.68507
2006:02
-3.968452
1998:04
2009:02
-4.428647
2007:01
2011:01
-5.194852
2001:03
2007:01
-5.727264
1995:04
2004:04

TEST / VARIABLE
ADF
KPSS
DF-GLS
LS (T-STAT)
Break Date 1
Break Date 2
ZIVOT-ANDREWS
Break Date
PERRON - MEAN
Date1
Date2
PERRON - CRASH
Date1
Date2
PERRON - JOIN
Date1
Date2
PERRON - BREAK
Date1
Date2

CREDIT QUALITY

H0
Unit Root
Stationarity
Unit Root
Unit Root with 2 breaks
Unit root with 1 break
Breaks with unit roots

-0.32551
0.377710*
-0.501
-4.0445
2000:02
2010:01
-2.53420
2008:02
-2.130366
2001:04
2011:04
-2.478756
2008:02
2011:04
-4.218009
2000:01
2010:04
-3.609186
2006:01
2010:03

Table 4: Stationarity tests for selected variables. */**/*** corresponds to 10%/5%/1% rejection of the null hypothesis. M/C/J/B stand for mean/crash/join/ full break,
respectively. From Doan (2010): a) Crash means that the trend rate remains the same before and after, but there is an immediate change in the level; b) Join means that the
trend rate changes,but there is no immediate change to the level; c) Break means that both the trend and the level change.

ADF
-1.19120
-2.48433
-2.53730
-2.15875
-1.48085
-5.35864***
-1.88067
-2.84837*
-8.81555***
-3.01638**
-3.38543**
-2.05734
-2.96345**
-1.26998
-2.19697
-2.35309
-2.66211*
-1.38322
-2.14874
-0.40026
-1.25678
-0.07512
-2.25159
0.90126
1.29849
-2.68422*
-2.20001
-1.99264
-3.05124**
-1.07583
-3.64076***
-3.62430***
-2.13661

VARIABLE / TEST

34

Survey

Economic Sentiment Indicator

Business Confidence
Business Confidence
Consumers Confidence
Consumers Confidence
Bank Lending Survey
Bank Lending Survey

Dummy

ESI
Demand
Financial
Cons. Car
Cons. Home
BLS Q.4
BLS Q.7

to
to
to
to
to
to
to
to
to
to
to
to
to
to

to
to
to
to
to
to

4)
4)
4)
4)
4)
4)

4)
4)
4)
4)
4)
4)
4)
2)
4)
4)
4)
4)
4)
4)

EC
Eurostat
Eurostat
Eurostat
Eurostat
ECB, BoI
ECB, BoI

Source

(3
(3
(0
(3
(3
(0

Lags

(1
(1
(1
(1
(1
(0
(0
(0
(1
(1
(1
(1
(1
(1

Lags

List of Determinants

The Economic sentiment indicator is a composite measure (average = 100)

Demand (% s.a. - quarterly question 8 - Factors limiting the production)
Financial (% s.a. - quarterly question 8 - Factors limiting the production)
Consumer opinions - Intention to buy a car within the next 12 months
Consumer opinions - Purchase or build a home within the next 12 months
Question 4, pg. 5, ECB - BLS Questionnaire
Question 7, pg. 8, ECB - BLS Questionnaire

Question

Leverage banks, Spread lending rate vs 3m rate, REER, Real GDP, CPI, Bank credit to NFS, Capital / loans
ROA banks, ROE banks, Oper. Costs / income, Slope, Res. Prop. Prices, Stock Index
Spread ITA vs GER, Vol. Eurexx
Leverage banks, Spread lending rate vs 3m rate, REER, Real GDP, CPI, Bank credit to NFS, Capital / loans
ROA banks, ROE banks, Oper. Costs / income, Slope, Res. Prop. Prices, Stock Index
Int Margin / Gross Margin, Spread ITA vs GER, Vol. Eurexx

Instrumental Variables List

Short rate, CPI, Investments, Real GDP, Unempl. rate, Debt to GDP, CA to GDP
Spread ITA vs GER, Slope, Stock Index, Res. Prop. Prices, Bank credit to NFS, REER
Leverage, ROE, ROA, Oper. Costs / income, LLP / Loans, Capital / Loans, Liquidity Ratio
Int. Exp. / EBITDA, Leverage, ROE, ROA, Structure, Capitalization
First Factor, Second Factor, Third Factor
Real GDP, Unempl. rate, Short rate, Oper. Costs / income, Leverage Firms, Durable Cons.,
Investments, CPI, Bank Credit to NFS, Slope, Stock Index
Leverage banks, Spread lending rate vs 3m rate, REER, Real GDP, CPI, Bank credit to NFS, Capital / loans
Real GDP, Unempl. Rate, Real Lending Rate, ROA Banks
Real GDP, Unempl. Rate, Real Lending Rate, Capital / Loans
Real GDP, Unempl. Rate, Real Lending Rate, Funding Ratio
Real GDP, Unempl. Rate, Real Lending Rate, Oper. Costs / income
Real GDP, Unempl. Rate, Real Lending Rate, Bank credit to NFS
Real GDP, Unempl. Rate, Real Lending Rate, LLP / Loans

Table 5: Overview of models definitions and dummies specifications. List of determinants before the stepwise regression.

Ghosh (2005), Equation 1

Dep. Variable

1
3
4
5
6
Loans

SBL / Loans

Model

(g)
(h)
(i)
(j)
(k)
(l)
(m)

Ghosh (2005), Equation 1

Ghosh (2005), Equation 1

Louizas et al. (2010), Model
Louizas et al. (2010), Model
Louizas et al. (2010), Model
Louizas et al. (2010), Model
Louizas et al. (2010), Model
Louizas et al. (2010), LLP /

(a)
(b)
(c)
(d)
(e) - (e)
(f)

Def. Rate

Type

Macro Variables
Financial Variables
Banking Variables
Industrial
Factors from PCA
Bofondi and Ropele (2011)

Model

Dependent Variable: Default Rate

Det. / Model
Constant
Default rate (1)
Default rate (2)
Default rate (3)
Default rate (4)
Real GDP
Real GDP (1)
Real GDP (2)
Real GDP (3)
Real GDP (4)
CPI
CPI (1)
CPI (2)
Short Rate (2)
Short Rate (4)
Investments (1)
Investments (3)
Unempl. Rate (2)
Unempl. Rate (4)
Durable Cons. (2)
Durable Cons. (3)
DEBT to GDP (2)
DEBT to GDP (3)
CA to GDP (3)
CA to GDP (4)
Stock index
Stock index (2)
Stock index (4)
Res. Prop. Prices (1)
Res. Prop. Prices (3)
Bank Credit
Bank Credit (1)
Bank Credit (2)
Bank Credit (4)
REER
REER (1)
REER (2)
Spread (1)
Spread (2)
Leverage banks
Leverage banks (1)
Leverage banks (4)
ROA banks (4)
LLP / loans (2)
LLP / loans (4)
Capital / loans
Capital / loans (1)
Capital / loans (2)
Liquidity Ratio (1)
Int. Exp. / EBITDA (2)
Int. Exp / EBITDA (3)
Leverage firms (1)
Leverage firms (3)
ROA firms (1)
Capitalization (2)
Third Factor (1)
Third Factor (4)
Third Factor al. (1)
N.
Adjsted R squared
Durbin Watson
LB-Q 10 lags
J-Specification (14)
J Significance

(a)
-0.467***

0.331***

(b)
-0.529***
-0.367***
-0.308***
0.180**

(c)
-0.794***
-0.589***
-0.305*
0.141

(d)
-0.565***
-0.203*
-0.256**
0.206**

(e)
-0.651***
-0.367**
-0.434***

(e)
-0.792***
-0.562***
-0.589***

(f )
-0.765***
-0.483***
-0.512***

(g)
0.003
-0.673***
-0.025

-0.037
-0.029
0.047
-0.031*
-0.145*
0.059
-0.073
0.101***
-0.043***
-0.025***
-0.0193***
0.092**
0.236***
-0.005*
-0.009***
0.012***
0.018***
-0.058***
-0.026*
0.002
-0.001
-0.002**
-0.015***
-0.034**
0.001
-0.014
-0.053**

-0.021***
-0.022**

0.001
0.000
-0.024
0.013
0.184
0.325*
-0.313***
-0.051

-0.012**

-0.078**
0.080***
-0.307***
1.716***
-0.347*

0.192*
-0.184
0.044

-0.061**
-0.061*
2.363***
3.040**
-5.019**
4.608***
0.118
-0.128***
-0.012***
-0.012**
0.023***
86
0.612
2.058
0.834

74
0.596
2.292
0.469

70
0.696
2.041
0.8503

85
0.493
1.977
0.470

74
0.478
1.791
0.8171

69
0.549
1.814
0.764

80
0.635
2.039
0.763

69
0.234
1.898
0.220
9.916
0.768

Table 6: Determinants of default rate. */**/*** corresponds to 10%/5%/1% significance level. OLS estimation with HAC
Newey-West standard errors. N. is the number of usable observations. LB-Q is the Q statistic of Ljung-Box. J is the J statistic of
Hansen. (a) is the model with macroeconomic determinants; (b) is the one with financial and asset prices determinants; (c) is the
one with banking determinants; (d) is the one with industrial determinants. (e) and (e) are the models with three factors obtained
from a principal components analysis on two different datasets excluding/including banks and firms specific variables. (f) is the
model of Bofondi and Ropele (2011). (g) is the Ghosh (2005) model estimated with instrumental variables. We use one to four lags
for the determinants of models (a), (b), (c), (d), (e), current values plus one to four lags for model (f), and current values plus one
and two lags for the determinants of model (g). One to four lags for the dependent variable. Positive values in parenthesis mean the
corresponding lag.

Dependent Variable: Default Rate

Det. / Model

(h)

(i)

(j)

(k)

(l)

(m)

Default rate (1)

Default rate (2)
Default rate (3)
Default rate (4)
Real GDP (1)
Real GDP (3)
R. lend. rate (2)
R. lend. rate (3)
R. lend. rate (4)
Unempl. Rate (1)
Unempl. Rate (2)
Unempl. Rate (3)
Unempl. Rate (4)
Bank Credit (4)
ROA banks (3)
ROA banks (4)
LLP / loans (2)
LLP / loans (4)
Costs / income (2)
Capital / loans (4)
Funding Ratio (2)
Funding Ratio (4)

-0.853***
-0.599***
-0.623***

-0.689***
-0.512***
-0.500***
0.127

-0.766***
-0.594***
-0.652***

-0.648***
-0.383***
-0.416***

-0.599***
-0.363***
-0.417***

-0.728***
-0.463***
-0.371***
0.246***

-0.023***

-0.020*

-0.043***
0.113***

-0.040***
0.080**

-0.030**
0.105***

-0.101***

-0.095***

0.116**
0.101**
0.079*

0.154***
0.088

-0.122***
0.120**
0.214***

N.
Adjusted R squared
Durbin Watson
LB-Q 10 lags

70
0.627
1.845
0.926

0.068**
-0.059
-0.051
0.168***

0.155**

0.069

0.104***
-0.023***

-0.395***
-0.149***
1.606***
-0.379***
2.501*
-0.042***
0.103**
-0.079***
71
0.569
1.854
0.813

71
0.576
1.739
0.848

73
0.516
1.926
0.983

74
0.517
1.952
0.805

70
0.653
2.087
0.397

Table 6 (continued): Determinants of default rate. */**/*** corresponds to 10%/5%/1% significance level. OLS estimation with
HAC Newey-West standard errors. N. is the number of usable observations. LB-Q is the Q statistic of Ljung-Box. J is the J
statistic of Hansen. (h) is model 1 of Louizas et al. (2011), (i) is model 3 of Louizas et al. (2011), (j) is model 4 of Louizas et al.
(2011), (k) is model 5 of Louizas et al. (2011), (l) is model 6 of Louizas et al. (2011), and finally (m) uses real GDP growth, real
lending rate, unemployment rate and LLP / Loans. We use one to four lags for the determinants of all models. One to four lags for
the dependent variable. Positive values in parenthesis mean the corresponding lag. See Section (3) and Table (8) of the referenced
paper for additional information.

36

Dependent Variable: Default Rate

Det. / Model
ESI Dummy
BLS Q.4 Dummy
Default rate (1)
Default rate (2)
Default rate (3)
Default rate (4)
Real GDP (1)
Real GDP (2)
Real GDP (3)
R. lend. rate (2)
R. lend. rate (4)
Unempl. Rate (1)
Unempl. Rate (2)
Unempl. Rate (3)
Unempl. Rate (4)
Bank Credit (4)
Leverage banks (1)
Leverage banks (4)
ROA banks (3)
ROA banks (4)
LLP / loans (2)
LLP / loans (3)
Costs / income (3)
Capital / loans (1)
Capital / loans (2)
Capital / loans (4)
Funding Ratio (2)
Funding Ratio (4)
N.
Adjusted R squared
Durbin Watson
LB-Q 10 lags

(c)
-0.059***
0.079**
-0.965***
-0.824***
-0.553***

(h)
-0.066**

(i)
-0.090***

(j)
-0.090***

-0.869***
-0.645***
-0.666***

-0.787***
-0.693***
-0.685***

-0.802***
-0.685***
-0.735***

-0.046***
0.112***
-0.115***

-0.047***
0.088***
-0.126***
0.075
0.147***
0.086***

-0.035***
0.103***
-0.139***
0.116***
0.218***

(k)
0.088*
-0.696***
-0.507***
-0.520***

(l)
-0.063***
-0.606***
-0.385***
-0.429***

(m)
-0.050***
0.069
-0.952***
-0.822***
-0.742***

-0.026***

0.144***
0.115***

-0.032***

0.122*
0.076
0.109**

-0.032***
0.05**
-0.100*
0.156**

0.078***

-0.020***
-0.060*
0.071***
0.202
-0.418***
1.896***

-0.330***
-0.158***
0.602*
1.086***
3.508***
0.050***

-0.047**
-0.045***
0.102**
-0.087***
70
0.705
1.836
0.931

70
0.635
1.877
0.880

71
0.608
1.707
0.879

71
0.608
1.782
0.952

73
0.549
1.829
0.999

74
0.534
2.083
0.944

70
0.682
1.744
0.257

Table 7: Model with anxiety dummies from Delis et al. (2014). ESI is Economic Sentiment Indicator for Italy. BLS Q.4 is question
four from Bank Lending Survey for Italy. See Table (6) for further information on determinants, models and estimation
methodology.

37

Dependent Variable: Stock of Bad Loans / Total Loans

Det. / Model
Constant
SBL / Loans (1)
SBL / Loans (2)
SBL / Loans (3)
Real GDP
Real GDP (1)
Real GDP (2)
Real GDP (3)
Real GDP (4)
CPI
CPI (1)
CPI (2)
Slope (1)
Short Rate
Investments (1)
Unempl. Rate
Unempl. Rate (4)
Durable Cons. (2)
Durable Cons. (3)
DEBT to GDP (1)
Stock index (1)
Stock index (3)
Res. Prop. Prices (4)
Bank Credit
Bank Credit (1)
Bank Credit (2)
Bank Credit (4)
REER
REER (1)
REER (2)
Spread
Spread (1)
Spread (2)
Leverage banks
Leverage banks (1)
Leverage banks (2)
Leverage banks (4)
LLP / loans (3)
Capital / loans
Capital / loans (1)
Capital / loans (2)
Capital / loans (4)
Liquidity Ratio (2)
Liquidity Ratio (3)
Liquidity Ratio (4)
Int. Exp. / EBITDA (3)
Leverage firms
Leverage firms (2)
Leverage firms (4)
Structure index (2)
First Factor (1)
First Factor al. (1)
Second Factor al. (2)
Second Factor al. (3)
Second Factor al. (4)
N.
Adjusted R squared
Durbin Watson
LB-Q 10 lags
J-Specification (19)
J Significance

(a)
-0.443***
-0.289**

(b)
-0.558***
-0.442***
-0.159*

(c)

(d)

-0.414***
-0.299**
-0.251**

-0.342***
-0.256*

(e)
-0.413***
-0.325**

(e)

(f )

(g)

-0.498***
-0.419***
-0.180*

0.067***
-1.098***
-0.941***
-0.789***
0.129***

0.025
-0.159
-0.230*

-0.092***
-0.050***
0.081***
-0.150***
0.130**

-0.241

-0.035
0.008
0.001

-0.173*
-0.096
-0.018

0.134***
-0.134***
0.021***
-0.117***
0.383***
-0.021***
-0.013***

0.130

0.018
0.003***
-0.003
-0.072**
0.032
0.008
-0.010
-0.050***
0.014
0.019
-0.002
-0.289
0.340**
-0.049
-0.121
-0.101
0.277

0.027**

-0.226*
-0.269**
1.957***

-0.072
-0.190
0.511**
-0.416***
-0.149
-0.271***
0.152**
-1.27***
3.890***
-3.010***
3.520***
3.914**
0.047***
0.085***
-0.029***
-0.034
0.050*
60
0.293
2.097
0.822

60
0.403
2.055
0.816

59
0.337
2.107
0.945

59
0.105
2.052
0.951

60
0.187
2.130
0.963

59
0.233
2.031
0.888

58
0.813
2.292
0.714

57
0.285
2.495
0.363
12.179
0.878

Table 8: Determinants of bad loans / total loans. */**/*** corresponds to 10%/5%/1% significance level. OLS estimation with
HAC Newey-West standard errors. N. is the number of usable observations. LB-Q is the Q statistic of Ljung-Box. J is the J
statistic of Hansen. (a) is the model with macroeconomic determinants; (b) is the one with financial and asset prices determinants;
(c) is the one with banking determinants; (d) is the one with industrial determinants. (e) and (e) are the models with three factors
obtained from a principal components analysis on two different datasets excluding/including banks and firms specific variables. (f)
is the model of Bofondi and Ropele (2011). (g) is the Ghosh (2005) model estimated with instrumental variables. We use one to
four lags for the determinants of models (a), (b), (c), (d), (e), current values plus one to four lags for model (f), and current values
plus one and two lags for the determinants of model (g). One to four lags for the dependent variable. Positive values in parenthesis
mean the corresponding lag.

38

Dependent Variable: Stock of Bad Loans / Total Loans

Det. / Model

(h)

(i)

(j)

(k)

(l)

(m)

Constant
SBL / Loans (1)
SBL / Loans (2)
SBL / Loans (3)
Real GDP
Real GDP (1)
Real GDP (2)
Real GDP (3)
Real GDP (4)
R. lend. rate (1)
R. lend. rate (2)
R. lend. rate (4)
Unempl. Rate (4)
Bank Credit (4)
LLP / loans (3)
Costs / income (1)
Capital / loans (4)
Funding Ratio (2)

0.039
-0.469***
-0.396***
-0.243**

0.040*
-0.426***
-0.325***
-0.177*

-0.338***
-0.258**

0.043*
-0.501***
-0.438***
-0.292**

-0.508***
-0.388***
-0.185*

-0.381***
-0.270***

-0.073***

-0.087***

-0.086***

-0.077***

-0.053***

0.045

0.054*

-0.057***
-0.059***
0.072**

N.
Adjusted R squared
Durbin Watson
LB-Q 10 lags

0.125***

0.269***

0.073**

0.150***

0.290***

0.258***

0.310***

0.094***
-0.133**
0.225***
-0.041***
1.906***

4.226
-0.138***
-0.127
59
0.286
1.991
0.854

60
0.332
1.987
0.561

60
0.286
1.966
0.632

59
0.297
2.021
0.835

60
0.368
1.811
0.827

59
0.291
2.068
0.8581

Table 8 (continued): Determinants of bad loans / total loans. */**/*** corresponds to 10%/5%/1% significance level. OLS
estimation with HAC Newey-West standard errors. N. is the number of usable observations. LB-Q is the Q statistic of Ljung-Box. J
is the J statistic of Hansen. (h) is model 1 of Louizas et al. (2011), (i) is model 3 of Louizas et al. (2011), (j) is model 4 of Louizas
et al. (2011), (k) is model 5 of Louizas et al. (2011), (l) is model 6 of Louizas et al. (2011), and finally (m) uses real GDP growth,
real lending rate, unemployment rate and LLP / Loans. We use one to four lags for the determinants of all models. One to four lags
for the dependent variable. Positive values in parenthesis mean the corresponding lag. See Section (3) and Table (8) of the
referenced paper for additional information.

39

Dependent Variable: Stock of Bad Loans / Total Loans

Det. / Model
Constant
ESI Dummy
Demand Dummy
Financial Dummy
BLS Q.4 Dummy
BLS Q.7 Dummy
SBL / Loans (1)
SBL / Loans (2)
SBL / Loans (3)
Real GDP
Real GDP (2)
Real GDP (3)
Real GDP (4)
CPI (1)
Slope (1)
R. lend. rate (2)
Short Rate
Investments (2)
Unempl. Rate (2)
Unempl. Rate (4)
Durable Cons. (2)
Durable Cons. (3)
CA to GDP (1)
CA to GDP (3)
Res. Prop. Prices (4)
Bank Credit (3)
Bank Credit (4)
REER (1)
LLP / loans (1)
LLP / loans (4)
Costs / income (1)
Costs / income (2)
Capital / loans (1)
Capital / loans (2)
Capital / loans (4)
Liquidity Ratio (3)
Int. Exp. / EBITDA
Int. Exp. / EBITDA (1)
Int. Exp. / EBITDA (2)
Int. Exp. / EBITDA (3)
Int. Exp. / EBITDA (4)
Leverage Firms
Leverage Firms (1)
Leverage Firms (4)
First Factor (2)
First Factor (3)
First Factor al. (1)
First Factor al. (2)
First Factor al. (4)
N.
Adjusted R squared
Durbin Watson
LB-Q 10 lags

(a)

(b)

(c)

(d)

(e)

(e)

(f )
0.089***

0.099*
0.125***
-0.535***

-0.271***

0.159**

0.167***
0.094*
-0.441***

-0.510***
-0.407***
-0.360***

-0.514***
-0.368***
-0.149*

0.204***
-0.453***
-0.303***
-0.317***

-0.554***

0.117**
-0.636***
-0.153**

-0.469***

-0.227***

-0.256**

-0.420***
-0.371***
-0.274***

-0.504***
-0.399***
-0.250**

-1.044***
-0.867***
-0.873***
0.095***
-0.072***
-0.072***

-0.078***
-0.062***
0.038
-0.151***

-0.306***
-0.102***

0.153***

-0.158***
0.020**
0.121***
0.338***
0.006**
-0.027***

0.311***

-0.056*
-0.047**
-0.076**
0.047***
-0.049***
0.020
1.775***
3.826*
-0.176**
0.148*
-0.157***
-0.304***
9.697**
-3.608***
3.154***
-1.670***
-9.285**
6.231***
-4.180***
2.629***

4.669*

0.104***
-0.053**
0.077***
-0.020***
0.014
60
0.503
2.155
0.313

60
0.456
2.193
0.616

59
0.426
2.433
0.540

59
0.15
2.347
0.816

60
0.316
2.231
0.468

59
0.281
2.202
0.815

58
0.859
2.578
0.220

Table 9: Model with anxiety dummies from Delis et al. (2014). ESI is Economic Sentiment Indicator for Italy. Demand and
Financial are respectively answers F2S and F6S to the question 8: Factors Limiting the Production for Italy from Eurostat
business survey. BLS Q.4 and BLS Q.7 are questions four and seven from Bank Lending Survey for Italy. See Table (8) for further
information on determinants, models and estimation methodology.

40

Dependent Variable: Stock of Bad Loans / Total Loans

Det. / Model

(h)

ESI Dummy
Demand Dummy
Financial Dummy
SBL / Loans (1)
SBL / Loans (2)
SBL / Loans (3)
Real GDP (2)
Real GDP (3)
Real GDP (4)
R. lend. rate (2)
Unempl. Rate (4)
Bank Credit (4)
LLP / loans (1)
LLP / loans (4)
Costs / income (1)
Capital / loans (4)

0.099
0.150***
-0.573***
-0.509***
-0.379***
-0.337***
-0.085***
-0.066***
0.052**
0.113***
0.345***

N.
Adjusted R squared
Durbin Watson
LB-Q 10 lags

59
0.470
2.145
0.486

(i)

(j)

(k)

(l)

(m)

0.159***
-0.584***
-0.496***
-0.366***
-0.332***
-0.094***
-0.059***
0.054**
0.079***
0.307***

0.097
0.151***
-0.563***
-0.500***
-0.399***
-0.328***
-0.089***
-0.065***
0.050**
0.100**
0.333***

0.103*
0.166***
-0.565***
-0.553***
-0.437***
-0.396***
-0.091***
-0.071***
0.049***
0.130***
0.394***

0.096
0.145***
-0.526***
-0.505***
-0.426***
-0.329***
-0.088***
-0.058***
0.062***
0.097**
0.289***
-0.033*

0.129**
0.149***
-0.495***
-0.560***
-0.443***
-0.384***
-0.095***
-0.069***
0.064***
0.098*
0.284***
-0.864*
1.465

4.230
-0.115***
60
0.483
2.218
0.605

60
0.461
2.100
0.546

59
0.486
2.226
0.531

60
0.493
2.099
0.561

59
0.497
2.178
0.358

Table 9 (continued): Model with anxiety dummies from Delis et al. (2014). ESI is Economic Sentiment Indicator for Italy. Demand
and Financial are respectively answers F2S and F6S to the question 8: Factors Limiting the Production for Italy from Eurostat
business survey. BLS Q.4 and BLS Q.7 are questions four and seven from Bank Lending Survey for Italy. See Table (8) for further
information on determinants, models and estimation methodology.

41

LSTR model: Default Rate

Det. / Model
Default rate (1)
Default rate (2)
Investments (2)
Unempl. Rate (4)
Res. Prop. Prices (4)
Leverage firms (1)
Leverage firms (2)
Capitalization (1)
Capitalization (2)
Capitalization (3)
Capitalization (4)
First Factor (3)
First Factor (4)
Second Factor (3)
Second Factor (4)
Third Factor (2)
Third Factor (3)
Default rate (1)
Default rate (2)
Default rate (4)
Investments (2)
Unempl. Rate (3)
Unempl. Rate (4)
Short Rate (2)
Short Rate (4)
REER (2)
Res. Prop. Prices (2)
Bank Credit (1)
Leverage firms (2)
Capitalization (1)
Capitalization (2)
Capitalization (3)
Capitalization (4)
First Factor (1)
First Factor (3)
First Factor (4)
Second Factor (1)
Second Factor (3)
Second Factor (4)
Third Factor (2)
Third Factor (3)
Gamma
C

(1)

(2)

Standard Equation
0.644***
1.068***
-0.017***
0.025*
0.000

(3)

(4)

0.685***

0.336***
0.675***

1.583
0.582
3.835
-1.550
2.369
-1.348
-0.092***
0.093***
0.111***
-0.108***
0.015
0.012
Transition Equation
-1.618***
-1.526***
1.690***
-0.027
-0.463
0.627
0.233*
-0.151
-0.051***
0.047*
-0.068***

-0.291
-0.718**

0.102

0.882
-7.055
1.454
-5.719*
5.165***
-0.070
0.404***
-0.321***
0.071
-0.404***
0.320***
0.027
-0.058
1.626
1.161***

1.782***
0.839***

3.668
0.817***

8.561*
0.764***

Table 10: LSTR model for default rate. Model (1) is the macro model with investment, unemployment and short rate; model (2) is
the financial model with REER, real residential property prices and bank credit; model (3) is the model with firm specific variables:
interest expenses over EBITDA, leverage and capitalization index; model (4) is the model with our three factors from principal
component analysis. */**/*** corresponds to 10%/5%/1% significance level. The level of riskiness indicator with 8 lags of delay is
our estimated threshold.

42

ESTAR model: Stock of Bad Loans / Total Loans

Det. / Model

(2)

Constant
SBL / Loans (1)
SBL / Loans (2)
Unempl. Rate (1)
Stock index (1)
Stock index (4)
Bank Credit (1)
Leverage banks (2)
Capital / loans (2)
Liquidity Ratio (1)
Liquidity Ratio (3)
Liquidity Ratio (4)
First Factor (1)
Third Factor I (3)
Constant
SBL / Loans (1)
SBL / Loans (2)
SBL / Loans (4)
Unempl. Rate (3)
Spread (4)
Res. Prop. Prices (4)
Stock index (1)
Stock index (4)
Bank Credit (1)
Leverage banks (2)
Capital / loans (2)
Liquidity Ratio (2)
Liquidity Ratio (3)
Liquidity Ratio (4)
First Factor (1)
Third Factor al. (3)
Gamma
C

(4)

(4)

Standard Equation
-0.988
0.174
1.162***
1.530***
1.688***
-0.519
-0.692*

(5)

(6)

6.232
1.206***

-0.997
1.165***
-0.472***
0.360***

-0.000
-0.005***
0.021
-0.319
-0.243
-0.092

0.045
-0.339*
0.386*

0.104
0.130**
Transition Equation
2.506***
-0.357***
-0.006
0.038
-0.007
-0.059

-0.735
-0.693***
0.068
0.162*
0.095

-0.215***
-0.001
0.011*
-0.071
0.194
0.517
-0.489***
-0.167

-0.224***

1.344***
7.249***

29.777*
5.574***

0.301
-0.179

-0.075
-0.134**
1.442*
6.566***

18.539
7.963***

3.915
6.673***

Table 11: ESTR model for the ratio stock of bad loans over total loans. Model (2) is the financial model with stock index, real
residential property prices and bank credit; model (4) and (4) are the models with our three factors from principal component
analysis; model (5) is the model with bank specific variables, namely leverage, capital to loans ratio and liquidity ratio; model (6) is
a mixed model with unemployment rate, liquidity ratio and the spread between lending rate to non financial firms for loans with
maturity up to 5 years and the short rate. */**/*** corresponds to 10%/5%/1% significance level. The level of riskiness indicator
with 8 lags of delay is our estimated threshold.

Variable / Indicator

Default rate

SBL / Loans

Coefficient
Mu(1)(1)
Mu(2)(1)
Phi(1)(1,1)
Phi(2)(1,1)
Phi(3)(1,1)
Phi(4)(1,1)
Sigma(1,1)
P(1,1)
P(1,2)

-0.094**
0.203***
0.269**
0.314***
-0.091
-0.383***
0.048***
0.984***
0.023

0.537
0.865
0.713***
0.128
0.133
0.011
0.009***
0.872***
0.146*

Table 12: Estimation of Hamilton switching model for different credit risk indicator. */**/*** corresponds to 10%/5%/1%
significance level.

43

C.V. 1 SBL / LOANS

Rank
1
2
3
4
5
6
7

EigVal
0.66
0.56
0.33
0.24
0.16
0.05
0.00

1
2
3
4
5
6

0.47
0.28
0.22
0.21
0.12
0.00

1
2
3
4
5
6
7

0.59
0.47
0.31
0.23
0.18
0.10
0.01

1
2
3
4
5
6

0.76
0.64
0.49
0.43
0.14
0.02

1
2
3
4
5

0.45
0.36
0.26
0.03
0.00

1
2
3
4
5

0.46
0.30
0.17
0.03
0.00

1
2
3
4
5

0.49
0.37
0.17
0.08
0.00

Lambda-max
67.64
51.03
25.13
16.78
10.69
3.02
0.02

Trace
174.32
106.68
55.65
30.52
13.74
3.05
0.02

C.V. 1 Default rate

Trace-95%
111.68
83.82
59.96
40.10
24.21
12.28
4.07

EigVal
0.61
0.54
0.38
0.27
0.17
0.13
0.00

83.82
59.96
40.10
24.21
12.28
4.07

0.35
0.27
0.22
0.17
0.04
0.00

111.68
83.82
59.96
40.10
24.21
12.28
4.07

0.43
0.41
0.29
0.17
0.14
0.08
0.03

83.82
59.96
40.10
24.21
12.28
4.07

0.41
0.23
0.20
0.09
0.03
0.01

59.96
40.10
24.21
12.28
4.07

0.42
0.32
0.24
0.10
0.00

59.96
40.10
24.21
12.28
4.07

0.40
0.34
0.25
0.03
0.00

59.96
40.10
24.21
12.28
4.07

0.40
0.27
0.08
0.06
0.02

C.V. 2 SBL / LOANS

38.90
20.70
15.31
14.58
8.18
0.20

97.86
58.97
38.27
22.96
8.38
0.20

151.53
96.59
57.66
35.36
19.24
6.76
0.57

235.23
147.92
85.55
44.96
10.58
1.14

84.74
47.56
20.23
1.60
0.02

74.03
35.61
13.86
2.03
0.08

86.69
44.57
16.39
4.98
0.12

83.82
59.96
40.10
24.21
12.28
4.07

40.17
38.03
24.27
13.17
10.30
5.73
2.04

133.71
93.55
55.51
31.24
18.07
7.77
2.04

111.68
83.82
59.96
40.10
24.21
12.28
4.07

44.43
22.71
19.30
7.99
2.61
1.03

98.07
53.65
30.94
11.64
3.65
1.03

83.82
59.96
40.10
24.21
12.28
4.07

40.22
28.57
20.54
7.96
0.33

97.62
57.41
28.84
8.29
0.33

59.96
40.10
24.21
12.28
4.07

C.V. 6 Default rate

C.V. 7 SBL / LOANS

42.12
28.18
11.41
4.86
0.12

102.31
66.11
40.03
19.01
3.35
0.21

C.V. 5 Default rate

C.V. 6 SBL / LOANS

38.42
21.74
11.84
1.94
0.08

36.21
26.08
21.01
15.67
3.13
0.21

C.V. 4 Default rate

C.V. 5 SBL / LOANS

37.18
27.32
18.63
1.58
0.02

Trace-95%
111.68
83.82
59.96
40.10
24.21
12.28
4.07

C.V. 3 Default rate

C.V. 4 SBL / LOANS

87.31
62.37
40.59
34.38
9.44
1.14

Trace
214.58
143.60
85.25
49.29
25.19
10.83
0.03

C.V. 2 Default rate

C.V. 3 SBL / LOANS

54.94
38.93
22.30
16.12
12.47
6.19
0.57

Lambda-max
70.98
58.35
35.95
24.10
14.35
10.80
0.03

38.72
30.81
21.63
2.67
0.01

93.83
55.11
24.31
2.68
0.01

59.96
40.10
24.21
12.28
4.07

C.V. 7 Default rate

44.27
27.77
7.36
5.05
2.01

86.46
42.19
14.42
7.06
2.01

59.96
40.10
24.21
12.28
4.07

Table 13: Johansen (1988) and (1991) trace and max tests for different cointegrating vectors (C.V.). Model 1: riskiness
indicator, Real GDP, CPI, Unempl. Rate, Short Rate, Investments, REER. Model 2: riskiness indicator, Stock index, Res. Prop.
Prices, M3, Spread, Slope. Model 3: riskiness indicator, Leverage, ROA, Op. Costs / income, Cap. / Loans, Liq. Ratio, Fund.
Ratio. Model 4: riskiness indicator, Leverage firm, Structure, ROA firm, Int. Exp. / EBITDA, Capitalization. Model 5: riskiness
indicator, Real GDP, CPI, Spread, Bank credit. Model 6: riskiness indicator, Unempl. Rate, CPI, Spread, Bank credit. Model 7:
riskiness indicator, Real GDP, CPI, Short Rate, Bank credit.

44

z plus

z minus

Def. Rate vs:

dols

Attractor

Statistics
Phi

Equality

Above
Std. Error

Below
Std. Error

Coeff.

Coeff.

Real GDP (3)

Real GDP (4)
Investments
Investments (4)
CPI (4)
Long rate
Long rate(1)
Debt to GDP
Debt to GDP(2)
Debt to GDP(3)
Debt to GDP(4)
Stock index (1)
Stock index (2)
Slope(4)
Spread l.rate < 5y
Spread l.rate < 5y(1)
Spread l.rate < 5y(2)
Spread l.rate < 5y(3)
Spread l.rate < 5y(4)
Spread l.rate > 5y
Spread l.rate > 5y(1)
Spread l.rate > 5y(2)
Spread l.rate > 5y(3)
Bank credit
Bank credit (1)
Bank credit (2)
Bank credit (3)
Bank credit (4)
Res prop. prices
Res prop. prices(1)
Res prop. prices(2)
Res prop. prices(3)
Res prop. prices(4)
Spread
Spread(1)
Spread(2)
Spread(3)
Spread(4)
Bank LEVERAGE
ROA Banks(3)
LLP / LOANS
Capital / Loans
Capital / Loans(1)
Capital / Loans(2)
Capital / Loans(3)
Capital / Loans(4)
LEVERAGE firms(4)
Int. Costs / EBITDA
Int. Costs / EBITDA(1)
Int. Costs / EBITDA(2)
Int. Costs / EBITDA(3)
Int. Costs / EBITDA(4)
ROA firms
ROA firms(1)
ROA firms(2)

-0.052
-0.056
-0.024
-0.037***
0.176***
0.073***
0.074***
0.017***
0.017***
0.018***
0.019***
0.001
0.000
0.049
0.320***
0.313***
0.283***
0.270***
0.233***
0.342***
0.317***
0.272***
0.246*
-0.058***
-0.060***
-0.060***
-0.061***
-0.061***
-0.052***
-0.051***
-0.050***
-0.052***
-0.054***
0.143***
0.146***
0.151***
0.148***
0.149***
-0.056
-0.204***
0.748***
0.111***
0.119***
0.136***
0.144***
0.153***
5.461***
1.821**
2.265***
2.588***
2.674***
2.895***
-0.144
-0.190
-0.210*

0.90
0.90
0.93
0.82
0.30
0.03
-0.02
-1.41
-1.42
-1.44
-1.61
0.80
0.82
0.61
-0.07
-0.03
0.06
0.09
0.23
-0.12
-0.03
0.07
0.12
0.96
0.94
0.93
0.94
0.86
0.58
0.55
0.53
0.56
0.61
0.54
0.29
0.47
0.49
0.46
1.58
1.46
0.14
-0.73
-0.80
-1.13
-1.13
-1.27
-1.32
0.39
0.23
0.14
0.08
-0.01
1.63
1.85
1.93

4.42
5.02
5.19
5.51
3.83
5.21
7.73
5.28
6.48
11.55
10.08
4.36
5.06
4.55
7.58
16.64
12.31
7.78
4.46
6.44
12.30
7.77
4.88
5.51
5.93
7.83
11.11
11.24
6.20
6.08
8.69
13.28
11.34
11.44
9.73
9.19
6.90
10.12
4.00
4.20
7.22
5.70
5.26
8.45
8.45
5.71
4.53
5.23
6.53
6.37
4.82
5.83
5.43
4.67
4.86

6.37
6.90
8.19
5.60
2.33
6.68
13.10
1.21
0.42
1.46
1.02
4.94
6.69
2.65
0.09
0.47
3.24
2.98
3.13
0.05
0.74
1.00
1.04
0.11
0.23
0.29
0.29
3.54
1.40
2.50
4.38
1.95
0.28
7.03
9.02
3.97
5.05
9.00
6.81
7.39
4.70
6.32
7.14
10.87
10.87
5.09
4.20
5.50
5.20
5.55
3.82
3.56
8.79
7.04
7.68

-0.40
-0.44
-0.55
-0.47
-0.40
-0.10
-0.08
-0.18
-0.17
-0.28
-0.23
-0.34
-0.42
-0.24
-0.35
-0.48
-0.49
-0.40
-0.39
-0.32
-0.43
-0.36
-0.28
-0.27
-0.24
-0.27
-0.31
-0.24
-0.21
-0.19
-0.21
-0.26
-0.30
-0.72
-0.22
-0.71
-0.83
-1.00
-0.81
-0.90
-0.85
-0.60
-0.72
-0.86
-0.86
-0.72
-0.15
-0.62
-0.60
-0.60
-0.50
-0.52
-0.66
-0.58
-0.55

0.14
0.14
0.18
0.15
0.17
0.06
0.06
0.06
0.05
0.06
0.06
0.12
0.13
0.08
0.10
0.09
0.11
0.11
0.14
0.10
0.09
0.10
0.10
0.09
0.08
0.07
0.07
0.06
0.07
0.07
0.06
0.06
0.07
0.18
0.09
0.19
0.25
0.24
0.30
0.32
0.25
0.18
0.23
0.21
0.21
0.23
0.09
0.22
0.20
0.19
0.18
0.17
0.21
0.20
0.18

-0.04
-0.05
-0.04
-0.09
-0.13
-1.04
-1.95
-0.45
-0.32
-0.11
-0.60
-0.05
-0.05
-0.06
-0.42
-0.37
-0.21
-0.14
-0.11
-0.36
-0.30
-0.21
-0.14
-0.21
-0.34
-0.38
-0.42
-0.85
-0.48
-0.68
-1.04
-0.65
-0.41
-0.24
-0.96
-0.31
-0.28
-0.31
-0.04
-0.04
-0.31
-0.11
-0.10
-0.14
-0.14
-0.20
-0.64
-0.10
-0.14
-0.13
-0.13
-0.17
-0.04
-0.05
-0.04

0.05
0.05
0.04
0.07
0.07
0.36
0.52
0.24
0.23
0.13
0.36
0.06
0.05
0.08
0.20
0.15
0.11
0.10
0.08
0.17
0.13
0.11
0.10
0.15
0.20
0.21
0.20
0.32
0.22
0.31
0.40
0.27
0.20
0.08
0.24
0.11
0.11
0.12
0.04
0.04
0.12
0.09
0.08
0.09
0.09
0.11
0.24
0.06
0.07
0.07
0.08
0.10
0.04
0.04
0.04

-0.422***
-0.420***
-0.536***
-0.313***
-0.360***
-0.147*
-0.158*
-0.127
-0.128
-0.139
-0.063
-0.342***
-0.424***
-0.280*
-0.121
-0.282***
-0.367***
-0.275***
-0.014
-0.089
-0.227***
-0.260***
-0.209*
-0.064
-0.074
-0.100
-0.152
-0.110
-0.015
0.004
-0.068
-0.114
-0.059
-0.432***
-0.410***
-0.764***
-0.712***
-0.942***
-0.712***
-0.932***
-0.529*
-0.585***
-0.712***
-0.381**
-0.621***
-0.602***
-0.172
-0.724***
-0.668***
-0.580***
-0.487***
-0.634***
-0.589***
-0.461***
-0.415***

-0.004
0.000
-0.021
-0.016
-0.084
-0.905***
-1.731***
-0.478
-0.206
0.101
-0.304
0.006
-0.004
0.053
-0.103
-0.164
-0.015
0.113
0.142
-0.075
-0.110
-0.027
0.115
-0.266
-0.228
-0.133
-0.212
-0.345
-0.729**
-0.801***
-1.031***
-0.444
-0.308
-0.464***
-0.927***
-0.341
-0.250*
-0.155
-0.042
-0.070
-0.382**
-0.126
-0.099
-0.332***
-0.263**
-0.300**
-0.597*
-0.112
-0.129
-0.211
-0.130
-0.001
-0.069
-0.120
-0.105

Table 14: Enders and Granger (1998) asymmetric adjustment test. TAR model for bivariate cointegrating vectors with two lags
from AIC. The threshold series is cointegrating vector(1). Attractor = Threshold value. dols is the coefficient from the DOLS
estimation of Stock and Watson (1993). 1 and 2 are the coefficients in Equation (6), while z plus and z minus are respectively
z plust1 and z minust1 . */**/*** corresponds to 10%/5%/1% significance level. HAC Newey-West standard errors.

45

Statistics

Above

Below

Def. Rate vs:

Threshold

Phi

Equality

Std. Error

Std. Error

CPI (4)
Short Rate (1)
Short Rate (2)
Short Rate (3)
Short Rate (4)
Long Rate
Long Rate (1)
Long Rate (2)
Unempl. Rate
Unempl. Rate (1)
Unempl. Rate (2)
Unempl. Rate (3)
Unempl. Rate (4)
Debt to GDP
Debt to GDP(1)
Debt to GDP(2)
Debt to GDP(3)
Debt to GDP(4)
Stock index (2)
Slope(3)
Spread l.rate < 5y
Spread l.rate < 5y(1)
Spread l.rate < 5y(2)
Spread l.rate < 5y(3)
Spread l.rate < 5y(4)
Spread l.rate >5y
Spread l.rate >5y(1)
Spread l.rate >5y(2)
Spread l.rate >5y(3)
Bank credit
Bank credit (1)
Bank credit (2)
Bank credit (3)
Bank credit (4)
Res prop. prices
Res prop. prices(1)
Res prop. prices(2)
Res prop. prices(3)
Res prop. prices(4)
Bank LEVERAGE(3)
Spread
Spread(1)
Spread(2)
Spread(3)
Spread(4)
ROA Banks
ROA Banks(1)
ROA Banks(2)
LLP / LOANS
LLP / LOANS(1)
LLP / LOANS(2)
LLP / LOANS(3)
LLP / LOANS(4)
Capital / Loans
Capital / Loans(2)
Capital / Loans(3)
Capital / Loans(4)
LEVERAGE firms(1)
LEVERAGE firms(2)
LEVERAGE firms(3)
LEVERAGE firms(4)
Int. Costs / EBITDA
Int. Costs / EBITDA(1)
Int. Costs / EBITDA(2)

3.80
4.91
4.86
5.15
5.95
9.36
9.63
6.02
7.40
6.80
6.70
6.60
6.50
110.36
110.51
111.17
107.64
110.96
25.67
1.21
1.20
2.87
1.46
1.89
2.47
1.43
2.57
1.61
2.59
6.40
9.65
5.17
6.83
6.40
-1.65
0.67
-0.73
-1.68
0.67
12.74
3.41
4.60
4.22
3.03
1.25
3.32
3.29
3.29
0.72
0.65
0.69
0.70
0.86
11.64
12.35
12.44
12.28
0.40
0.36
0.36
0.36
0.18
0.19
0.28

4.74
5.23
5.82
5.40
6.08
8.81
9.22
5.85
7.28
7.61
6.64
5.62
5.05
7.84
9.97
8.94
6.07
3.98
6.53
4.67
9.58
11.24
7.13
4.74
3.21
5.83
8.11
4.97
6.25
7.33
8.29
10.94
11.93
12.02
7.77
10.64
11.17
11.18
9.70
4.06
11.16
11.75
8.78
6.60
6.93
7.89
6.52
5.44
13.61
11.47
7.75
4.76
4.80
5.08
5.59
6.95
5.71
8.11
6.77
5.81
5.41
5.71
5.32
4.70

3.93
6.34
8.13
8.41
10.36
9.74
10.68
6.02
8.70
9.84
7.05
3.15
3.11
9.64
14.47
11.19
3.68
1.67
6.57
3.20
9.18
2.78
0.89
1.51
1.61
5.15
3.19
1.47
6.96
6.71
8.34
11.08
9.82
11.29
6.91
12.70
11.90
6.97
6.86
3.47
6.43
7.78
3.18
1.53
0.96
12.80
9.78
7.22
11.24
14.53
8.59
3.47
4.05
1.21
2.26
2.40
0.80
8.98
6.45
4.87
3.32
5.85
3.02
1.84

-0.50
-0.42
-0.47
-0.54
-0.62
-0.70
-0.85
-0.61
-0.39
-0.30
-0.27
-0.25
-0.23
-0.38
-0.44
-0.46
-0.30
-0.27
-0.50
-0.05
-0.37
-0.09
-0.22
-0.30
-0.04
-0.29
-0.49
-0.15
-0.65
0.01
0.24
-0.09
-0.09
-0.08
-0.08
0.07
-0.09
-0.17
-0.10
-0.31
-0.71
-0.99
-0.85
-0.67
-0.59
-0.50
-0.46
-0.41
-1.06
-0.90
-0.72
-0.49
-0.49
-0.25
-0.18
-0.20
-0.48
-1.01
-0.81
-0.71
-0.62
-0.11
-0.16
-0.36

0.17
0.13
0.14
0.17
0.18
0.17
0.21
0.19
0.10
0.08
0.08
0.08
0.07
0.10
0.10
0.11
0.09
0.11
0.15
0.07
0.09
0.17
0.10
0.11
0.13
0.09
0.15
0.09
0.20
0.11
0.17
0.08
0.08
0.07
0.09
0.10
0.07
0.07
0.08
0.11
0.17
0.23
0.26
0.22
0.17
0.13
0.13
0.13
0.21
0.19
0.18
0.16
0.16
0.10
0.14
0.15
0.15
0.27
0.24
0.23
0.21
0.08
0.09
0.12

-0.14
-0.06
-0.05
-0.05
-0.04
-0.14
-0.16
-0.14
-0.01
0.11
0.07
-0.05
-0.01
0.00
0.00
-0.05
-0.09
-0.10
-0.09
-0.25
0.56
-0.39
-0.38
-0.12
-0.24
0.33
-0.21
-0.34
-0.11
-0.34
-0.29
-0.55
-0.48
-0.50
-0.45
-0.38
-0.56
-0.54
-0.43
-0.05
-0.26
-0.34
-0.39
-0.40
-0.40
0.03
0.00
-0.02
-0.33
-0.10
-0.12
-0.13
-0.12
-0.50
-0.45
-0.49
-0.29
-0.19
-0.20
-0.21
-0.23
-0.55
-0.46
-0.15

0.09
0.08
0.07
0.07
0.07
0.08
0.08
0.09
0.08
0.10
0.10
0.09
0.10
0.08
0.07
0.06
0.07
0.07
0.07
0.08
0.29
0.08
0.13
0.10
0.09
0.25
0.08
0.13
0.07
0.09
0.08
0.12
0.10
0.10
0.11
0.09
0.12
0.13
0.10
0.10
0.10
0.10
0.12
0.14
0.16
0.08
0.09
0.09
0.14
0.14
0.13
0.13
0.11
0.22
0.14
0.13
0.18
0.09
0.09
0.10
0.11
0.17
0.16
0.11

Table 15: Enders and Siklos (2001) threshold adjustment test. M-TAR model for bivariate cointegrating vectors with two lags from
AIC. Threshold value for the variable.

46

Variable

SUP-LM Stat.

P-Value

Thresh.

Real GDP(3)
CPI(4)
Short Rate(4)
Unempl. Rate
Debt to GDP
Debt to GDP(3)
Stock index
Stock index(2)
Slope(1)
Slope(4)
Bank credit(1)
Bank credit(2)
Bank LEVERAGE(3)
Bank LEVERAGE(4)
Spread(4)
ROA Banks
LLP / LOANS
LLP / LOANS(1)
LLP / LOANS(4)
LEVERAGE firms
LEVERAGE firms(2)
Int. Costs / EBITDA
Int. Costs / EBITDA(1)
Int. Costs / EBITDA(2)
ROA firms(2)
ROA firms(3)
First Factor(2)
First Factor(3)
Second Factor(1)
Second Factor(2)
Second Factor(3)
Second Factor(4)

23.453
20.388
21.455
22.419
21.603
20.786
13.355
13.090
20.091
23.399
27.077
28.411
21.125
23.559
23.310
20.670
22.699
20.802
23.809
13.400
13.626
24.097
24.059
23.662
21.608
23.927
22.376
23.888
21.080
23.162
23.756
26.701

0.008
0.096
0.060
0.060
0.104
0.116
0.104
0.048
0.108
0.036
0.000
0.004
0.072
0.020
0.016
0.084
0.044
0.096
0.012
0.032
0.072
0.028
0.020
0.020
0.088
0.008
0.036
0.024
0.076
0.008
0.012
0.000

0.932
-0.213
0.205
0.021
0.159
0.062
1.042
0.801
0.651
0.731
-0.121
0.574
-0.290
-0.293
-0.227
0.162
-0.153
-0.186
-0.301
-0.103
0.011
0.263
0.198
0.154
0.204
0.054
0.451
0.571
0.342
0.368
0.358
0.688

C.V.
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,
(1,

0.080)
0.221)
0.112)
0.102)
0.007)
0.007)
0.014)
0.003)
0.299)
0.286)
0.070)
0.059)
0.047)
0.047)
0.285)
0.167)
0.846)
0.942)
1.004)
2.175)
2.271)
2.831)
2.857)
2.847)
0.121)
0.139)
0.034)
0.011)
0.097)
0.063)
0.073)
0.008)

Break Date

Below Coef.

Above Coef.

2009Q3
1996Q1
1995Q2
2007Q1
2009Q3
2008Q3
2011Q2
2008Q1
2009Q3
2011Q3
1998Q4
2007Q1
1998Q4
1996Q2
1995Q4
2006Q1
1997Q2
1999Q4
1999Q3
2003Q3
2008Q1
2011Q3
2011Q3
2010Q2
2006Q1
2004Q3
2003Q2
2006Q2
1998Q4
1998Q1
1999Q2
2008Q2

-0.069
-0.242
0.626*
-0.017
-0.158
0.149
0.042
0.086
-0.005
0.001
-0.055
0.004
0.048
-1.031
-0.208
-0.092
11.616***
-2.877***
-1.853***
0.383**
-0.107
-0.216***
-0.262***
-0.151
0.151
0.189
0.149
0.093
0.124
0.331
-1.871***
-0.067

-0.202
-0.191***
0.026
0.008
-0.327**
0.056
0.115
-0.196
0.293
0.261*
-0.091
-0.158
-0.044
-0.018
-0.256***
0.183
-0.106
-0.018
0.114
0.038
-0.117
0.248
0.060
-0.357
0.091
-0.033
-0.342***
-0.278***
0.054
-0.041
0.033
-0.326***

Table 16: Hansen and Seo (2002) test of linear versus threshold cointegration together with bivariate threshold VECM estimation.
SUP-LM Stat is the value of the test, corresponding to its P-Value. Thresh. is the threshold value of the cointegrating vector, C. V.
Break date is the first date of the Above regime. Below and Above Coeff. are the error correction term coefficients for the
corresponding regime. */**/*** corresponds to 10%/5%/1% significance level.

47

48

BVAR(2): spread between lending rate to non financial firms for loans with maturity up to 5 years and the short rate;
CPI; real GDP; bank credit to non financial sector; indicator
BVAR(2): spread between lending rate to non financial firms for loans with maturity up to 5 years and the short rate;
CPI; unemployment rate; bank credit to non financial sector; indicator
BVAR(2): short rate; CPI; real GDP; bank credit; indicator
BVAR(2): short rate; CPI; investments; real GDP; unemployment rate; CA to GDP; bank credit; indicator
BVAR(1): Spread ITA vs GER; Slope; Stock index; Res. Prop. Prices; Bank Credit; indicator
BVAR(2): (banks) Leverage; ROE; ROA; Op. Costs / Income; LLP / Loans; Capital / Loans; liquidity ratio; indicator
BVAR(2): (Firms): Int. Exp. / EBITDA; Leverage; ROE; ROA; Structure; Capitalization; indicator
FAVAR(2) (default rate); FAVAR(1) (SBL / Loans): Three factors and indicator
FAVAR(2): Three factors including specific and indicator
Balke (2000) TVAR(2): real GDP; short rate; bank credit; indicator. Upper regime
Balke (2000) TVAR(2): real GDP; short rate; bank credit; indicator. Lower regime
TVECM(2) default rate vs Unemployment rate (4) (default rate); vs Unemployment rate (SBL / Loans)
ARMA(2,2) (default rate); ARMA (2,0) (SBL / Loans)

Table 17: List of forecasting models for credit riskiness indicators. Lag selection with Akaike information criteria.

(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)

(b)

(a)

Forecasting. List of models:

Default Rate. Theils U statistic. Forecasting Horizon:

Model

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)

0.870
0.889
0.966
0.893
0.931
0.986
0.957
0.911
0.912
1.962
0.667
0.746
0.723

0.926
0.952
1.289
1.076
0.866
0.991
1.170
0.977
1.232
2.128
0.705
1.047
1.083

0.882
0.908
1.226
1.039
0.810
0.974
1.079
0.894
1.125
1.502
0.511
0.993
0.941

0.981
1.014
1.413
1.227
0.710
0.922
1.195
0.932
1.251
1.523
0.525
1.079
1.095

0.934
0.962
1.337
1.185
0.678
0.953
1.099
0.858
1.165
1.165
0.368
1.016
0.935

1.032
1.060
1.454
1.311
0.648
0.831
1.169
0.930
1.286
1.049
0.396
1.034
1.044

1.076
1.101
1.488
1.345
0.672
0.817
1.176
0.962
1.318
1.014
0.463
0.970
0.892

1.218
1.246
1.625
1.473
0.602
0.693
1.306
1.094
1.438
0.577
0.651
0.984
1.038

Table 18: Theils U statistics for different forecasting models of default rate.

SBL / Loans. Theils U statistic. Forecasting Horizon:

Model

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)

0.566
0.560
0.457
0.427
0.593
0.227
0.194
0.416
0.367
0.184
3.419
0.233
0.258

0.666
0.658
0.513
0.461
0.586
0.231
0.186
0.424
0.422
0.158
2.926
0.353
0.302

0.730
0.720
0.542
0.476
0.557
0.239
0.185
0.424
0.456
0.164
2.432
0.451
0.381

0.788
0.783
0.572
0.501
0.513
0.273
0.194
0.428
0.541
0.128
2.037
0.550
0.442

0.820
0.822
0.582
0.511
0.444
0.296
0.159
0.352
0.566
0.073
1.774
0.640
0.522

0.872
0.877
0.632
0.529
0.372
0.344
0.178
0.359
0.620
0.042
1.580
0.685
0.560

0.951
0.958
0.722
0.578
0.466
0.377
0.209
0.352
0.679
0.024
1.448
0.689
0.617

1.017
1.029
0.821
0.651
0.643
0.392
0.272
0.389
0.794
0.049
1.355
0.738
0.664

Table 19: Theils U statistics for different forecasting models of SBL / Loans.

49

Figures
15.0

1.4

1.2

12.5

1.0

10.0

0.8

7.5
0.6

5.0
0.4

0.2

2.5
1992

1995

1998

2001

2004

2007

2010

2013

1998

Default Rate

2000

2002

2004

2006

2008

2010

2012

2014

Credit quality (Bad Loans to Total Loans)

Figure 1. Credit Riskiness: Italian Firms. Percentage points. Shaded areas correspond to recessions
according to ECRI. Four quarters moving average window for default rates. Source: Bank of Italy.

50

Macroeconomic Variables

Interest Rates

12.5

17.5

10.0

15.0

7.5

12.5
4

5.0
10.0
2.5

2
7.5

0.0
0
5.0

-2.5

-2

2.5

-5.0
-7.5

0.0
1992

1994

1996

1998

2000

2002

2004

Real GDP
CPI

2006

2008

2010

2012

2014

-4
1992

1994

Unemployment Rate
CA to GDP

1996

1998

2000

2002

2004

Long Rate
Short Rate

Asset Prices

2006

2008

2010

2012

2014

Spread ITA vs GER (right)

Slope (right)

Economic Sentiment Indicators

20

75

120

103

115

15

50

102
110

10
25

105

101

5
0
0

100
100
95

-25

90

-5
-50

-10

99

85
98
80

-15

-75
1992

1994

1996

1998

2000

2002

Res. Property Prices

Bank Credit to NFS

2004

2006

2008

2010

2012

2014

75

97
1992

REER
Stock Market (right)

1994

1996

1998

2000

ESI

2002

2004

2006

2008

2010

2012

OECD CLI (right)

Figure 2. Selected indicators for Italy. Percentage points except for Economic Sentiment Indicators.
Source: See the Appendix.

51

2014

1.00

1.0

0.75

0.8

0.50

0.6

0.25

0.4

0.00

0.2

-0.25

0.0

-0.50

-0.2

-0.75

-0.4

-1.00
1999

2001

2003

2005

2007

2009

2011

-0.6

2013

1999

Default Rate
Probability of Increase

2001

2003

2005

2007

2009

2011

2013

Credit quality (Bad Loans to Total Loans)

Probability of Increase

Figure 3. Growth rate of credit riskiness indicators versus probabilities of being in expansion state.

52

1.6

20

1.4

18
16

1.2

14

1.0

12
0.8
10
0.6

0.4

0.2

0.0

2
2008

2009

2010

2011

2012

2013

Default rate

2014

2015

2016

2017

2018

2008

2009

2010

Forecast

2011

2012

2013

2014

SBL / Loans

Forecasting Default rate. Model (a).

Forecasting SBL / Loans. Model (a).

1.6

18

1.4

16

1.2

14

1.0

12

0.8

10

0.6

0.4

0.2

2015

2016

2017

2018

2016

2017

2018

2016

2017

2018

Forecast

0.0

2
2008

2009

2010

2011

2012

2013

Default rate

2014

2015

2016

2017

2018

2008

2009

2010

Forecast

2011

2012

2013

2014

SBL / Loans

Forecasting Default rate. Model (e).

Forecasting SBL / Loans. Model (e).

1.4

30

1.2

25

1.0

2015

Forecast

20

0.8
15
0.6
10

0.4

0.2
0.0

0
2008

2009

2010

2011

2012

Default rate

2013

2014

2015

2016

2017

2018

2008

2009

2010

Forecast

2011

2012

SBL / Loans

Forecasting Default rate. Model (h).

2013

2014

2015

Forecast

Forecasting SBL / Loans. Model (h).

Figure 4. Forecasting results from different models. See Table (17) for a detailed description. Estimation
period: 1992Q1 - 2013Q4 and 1998Q2 - 2013Q4 for default rate and SBL / Loans, respectively.

53

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-0.5

-0.5

-1.0

-1.0
2011

2012

2013

2014

Default rate
Unconditional

2015

2016

Conditional
+2SD Band

2017

2011

-2SD Band

2012

2013

Default rate
Unconditional

Default rate with negative .25% GDP growth year over year

2014

2015

2016

Conditional
+2SD Band

2017

-2SD Band

Default rate with negative GDP growth. Adverse Scenario EBA

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-0.5

-0.5

-1.0

-1.0
2011

2012

2013

Default rate
Unconditional

2014

2015

2016

Conditional
+2SD Band

2017

2011

-2SD Band

2012

2013

Default rate
Unconditional

Default rate with negative shock in CPI

2014

2015

2016

Conditional
+2SD Band

2017

-2SD Band

Default rate with shock in CPI. Adverse Scenario EBA

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-0.5

-0.5

-1.0

-1.0
2011

2012

2013

Default rate
Unconditional

2014

2015

Conditional
+2SD Band

2016

2017

2011

-2SD Band

2012

2013

Default rate
Unconditional

Default rate with 100bp increase in Lending rate spread

2014

2015

Conditional
+2SD Band

2016

2017

-2SD Band

Default rate with - 2% reduction in Bank Credit to NFS

Figure 5. Conditional forecast for default rate. BVAR(2) with Gibbs sampling. Variables: spread between
lending rate to non financial firms for loans with maturity up to 5 years and the short rate; CPI; real GDP;
bank credit to non financial sector; default rate. Estimation period: 1995Q1 - 2014Q1.

54

25.0

25.0

22.5

22.5

20.0

20.0

17.5

17.5

15.0

15.0

12.5

12.5

10.0

10.0

7.5

7.5

5.0

5.0

2.5

2.5
2011

2012

2013

2014

SBL / Loans
Unconditional

2015

2016

Conditional
+2SD Band

2017

2011

-2SD Band

2012

2013

SBL / Loans
Unconditional

2014

SBL / Loans with negative .25% GDP growth year over year

SBL / Loans with negative GDP growth. Adverse Scenario EBA

25.0

25.0

22.5

22.5

20.0

20.0

17.5

17.5

15.0

15.0

12.5

12.5

10.0

10.0

7.5

7.5

5.0

5.0

2.5

2015

2016

Conditional
+2SD Band

2017

-2SD Band

2.5
2011

2012

2013

2014

SBL / Loans
Unconditional

2015

2016

Conditional
+2SD Band

2017

2011

-2SD Band

2012

2013

SBL / Loans
Unconditional

2014

2015

2016

Conditional
+2SD Band

SBL / Loans with negative shock in CPI

SBL / Loans with shock in CPI. Adverse Scenario EBA

30

25.0

2017

-2SD Band

22.5

25

20.0
20

17.5
15.0

15

12.5

10

10.0
7.5

5.0

2.5
2011

2012

2013

2014

SBL / Loans
Unconditional

2015

Conditional
+2SD Band

2016

2017

2011

-2SD Band

2012

2013

SBL / Loans
Unconditional

SBL / Loans with 100bp increase in Lending rate spread

2014

2015

Conditional
+2SD Band

2016

2017

-2SD Band

SBL / Loans with - 2% reduction in Bank Credit to NFS

Figure 6. Conditional forecast for the stock of bad loans to total loans. BVAR(2) with Gibbs sampling.
Variables: spread between lending rate to non financial firms for loans with maturity up to 5 years and
the short rate; CPI; real GDP; bank credit to non financial sector; stock of bad loans / loans. Estimation
period: 1998Q2 - 2014Q1.

55

56

15

10

15

10

15

-0.10
5

-0.10

Spread

-0.05

-0.05

0.00

0.00

0.10

0.10
0.05

0.15

0.15

0.05

0.20

-1.0
5

-1.0
0

-0.5

-0.5

0.20

0.0

0.5

0.0

1.0

-0.6

-0.6

0.5

-0.4

-0.4

1.0

-0.2

-0.2

1.5

0.0

0.0

15

0.2

0.2

10

0.4

0.4

0.6

0.6

0.8

0.8

1.5

1.0

-0.2
10

-0.2
5

-0.1

-0.1

0.0

0.0

1.0

0.1

0.2

0.1

0.3

-0.15

-0.15

0.2

-0.10

-0.10

0.3

-0.05

-0.05

0.4

0.00

0.00

15

0.05

0.05

10

0.10

0.10

0.15

0.15

0.20

0.20

0.4

0.25

CPI

CPI

10

10

10

10

10

15

15

15

15

15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

-1.0

-0.5

0.0

0.5

1.0

1.5

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

10

10

10

10

10

Real GDP

Real GDP

15

15

15

15

15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

-1.0

-0.5

0.0

0.5

1.0

1.5

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

10

10

10

10

10

Bank credit

Bank credit

15

15

15

15

15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

-1.0

-0.5

0.0

0.5

1.0

1.5

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

10

10

10

10

10

Default rate

Default rate

15

15

15

15

15

Figure 7. Impulse response function from model (a). Overview of the responses (columns) to a shock (raws) in the other variables of the
model. Common scaled responses for all raws.

Default rate

Bank credit

Real GDP

CPI

Spread

0.30

0.25

Spread
0.30

0.04

0.010

0.03

0.005

0.02

0.000

0.01

-0.005

0.00
-0.010

-0.01

-0.015

-0.02

-0.020

-0.03
-0.04

-0.025
1

-2 SD

10

11

Default rate

12

13

14

15

16

+2 SD

-2 SD

Response of Default rate to a shock in Spread

10

11

Default rate

12

13

14

15

16

13

14

15

16

+2 SD

Response of Default rate to a shock in Bank credit

0.030

0.20

0.025

0.15

0.020
0.10

0.015
0.010

0.05

0.005

0.00

0.000
-0.05

-0.005
-0.010

-0.10
1

-2 SD

10

11

Default rate

12

13

14

15

16

+2 SD

-2 SD

Response of Default rate to a shock in CPI

10

11

Default rate

12
+2 SD

Response of Default rate to a shock in Default rate

0.015
0.010
0.005
0.000
-0.005
-0.010
-0.015
-0.020
-0.025
-0.030
1

-2 SD

10

11

Default rate

12

13

14

15

16

+2 SD

Response of Default rate to a shock in Real GDP

Figure 8. Impulse response function from model (a). Details of the response of default rate. Unscaled
responses.

0.020

0.005

0.015

0.000

0.010

-0.005

0.005

-0.010

0.000

-0.015

-0.005

-0.020

-0.010

-0.025

-0.015

-0.030
1

-2 SD

10

11

Default rate

12

13

14

15

16

+2 SD

-2 SD

Response of Default rate to a shock in Spread ITA vs GER

10

11

Default rate

12

13

14

15

16

13

14

15

16

13

14

15

16

+2 SD

Response of Default rate to a shock in Res. Prop. Prices

0.025

0.00

0.020

-0.01

0.015

-0.02

0.010

-0.03

0.005
-0.04

0.000

-0.05

-0.005

-0.06

-0.010
-0.015

-0.07
1

-2 SD

10

11

Default rate

12

13

14

15

16

+2 SD

-2 SD

Response of Default rate to a shock in Slope

10

11

Default rate

12
+2 SD

Response of Default rate to a shock in Bank credit

0.04

0.175

0.02

0.150
0.125

0.00

0.100
-0.02
0.075
-0.04

0.050

-0.06

0.025

-0.08

0.000
1

-2 SD

Response of Default rate to a shock in Stock index

Default rate

10

11

12

13

14

15

16

+2 SD

-2 SD

Default rate

10

11

12
+2 SD

Response of Default rate to a shock in Default rate

Figure 9. Impulse response function from model (e). Response of default rate. Unscaled responses.

57

Response of Default rate, 2003:Q3

0

Response of Short rate, 2003:Q3

1

Response of real GDP, 2003:Q3

2
1

0.05

0.5

0.1

0
3

12

15

18

21

Response of Default rate, 2009:Q3

0

12

15

18

21

Response of Short rate, 2009:Q3

1

12

15

18

21

Response of real GDP, 2009:Q3

2
1

0.05

0.5
0

0.1

12

15

18

21

Response of Default rate, 2013:Q1

0

12

15

18

21

Response of Short rate, 2013:Q1

1

12

15

18

21

Response of real GDP, 2013:Q1

2
1

0.05

0.5

0.1

0
3

12

15

18

21

12

15

18

21

12

15

18

21

Figure 10. Primiceri (2005) model with stochastic volatility. Shock in real GDP.

Response of Default rate, 2003:Q3

0.5

Response of real GDP, 2003:Q3

Response of CPI, 2003:Q3

0.5

12

15

18

21

Response of Default rate, 2009:Q3

0.5

12

15

18

21

Response of real GDP, 2009:Q3

12

15

18

21

Response of CPI, 2009:Q3

0.5

12

15

18

21

Response of Default rate, 2013:Q1

0.5

12

15

18

21

Response of real GDP, 2013:Q1

12

15

18

21

Response of CPI, 2013:Q1

0.5

12

15

18

21

12

15

18

21

12

15

18

Figure 11. Primiceri (2005) model with stochastic volatility. Shock in CPI.

58

21

Response of Default rate, 2003:Q3

0.2

Response of real GDP, 2003:Q3

0.5
0

Response of Short rate, 2003:Q3

4
2

0.2

12

15

18

21

Response of Default rate, 2009:Q3

0.2

0.5

12

15

18

21

Response of real GDP, 2009:Q3

0.5

12

15

18

21

Response of Short rate, 2009:Q3

4

0.5

0.2

12

15

18

21

Response of Default rate, 2013:Q1

0.2

12

15

18

21

Response of real GDP, 2013:Q1

0.5
0

12

15

18

21

Response of Short rate, 2013:Q1

4
2

0.2

12

15

18

21

0.5

12

15

18

21

12

15

18

21

Figure 12. Primiceri (2005) model with stochastic volatility. Shock in short rate.

Response of Default rate, 2006:Q3

0.2

Response of real GDP, 2006:Q3

2

Response of Spread, 2006:Q3

2
1

0.2

0
3

12

15

18

21

Response of Default rate, 2009:Q3

0.2

12

15

18

21

Response of real GDP, 2009:Q3

2

12

15

18

21

Response of Spread, 2009:Q3

2
1

0
0

0.2

12

15

18

21

Response of Default rate, 2013:Q1

0.2

12

15

18

21

Response of real GDP, 2013:Q1

2

12

15

18

21

Response of Spread, 2013:Q1

2
1

0.2

0
3

12

15

18

21

12

15

18

21

12

15

18

21

Figure 13. Primiceri (2005) model with stochastic volatility. Shock in the spread between lending rate to
non financial firms for loans with maturity up to 5 years and the short rate.

59

Response of real GDP, 2003:Q3

4

Response of short rate, 2003:Q3

2

Response of Default rate, 2003:Q3

1

0.5

12

15

18

21

Response of real GDP, 2009:Q3

4

0.5

12

15

18

21

Response of Short rate, 2009:Q3

2

12

15

18

21

Response of Default rate, 2009:Q3

1
0.5

0
0
2

0
3

12

15

18

21

Response of real GDP, 2013:Q1

4

12

15

18

21

Response of Short rate, 2013:Q1

2

0.5

12

15

18

21

Response of Default rate, 2013:Q1

1
0.5

0
0
2

0
3

12

15

18

21

12

15

18

21

0.5

12

15

18

21

Figure 14. Primiceri (2005) model with stochastic volatility. Shock in default rate.

60

Upper Regime: Response of Default rate

Upper Regime: Response of Default rate

Shock to Output

Shock to Money

0.125

0.15

0.100
0.10
0.075
0.050

0.05

0.025
0.00
-0.000
-0.025

-0.05

-0.050
-0.10
-0.075
-0.100

-0.15
0

+1 SD

+2 SD

10

11

12

-1 SD

13

14

15

-2 SD

+1 SD

Upper Regime: Response of Default rate

+2 SD

10

11

12

-1 SD

13

14

15

14

15

14

15

14

15

-2 SD

Upper Regime: Response of Default rate

Shock to Short rate

Shock to Default rate

0.20

0.3

0.15
0.2
0.10
0.05

0.1

-0.00
0.0
-0.05
-0.10

-0.1

-0.15
-0.2
-0.20
-0.25

-0.3
0

+1 SD

+2 SD

10

11

12

-1 SD

13

14

15

-2 SD

+1 SD

+2 SD

10

11

12

-1 SD

13
-2 SD

Figure 15. Balke (2000) model. Upper regime. Response of default rate.

Lower Regime: Response of Default rate

Lower Regime: Response of Default rate

Shock to Output

Shock to Money

0.50

0.75

0.50
0.25
0.25

0.00

0.00

-0.25
-0.25
-0.50

-0.50

-0.75
0

+1 SD

+2 SD

10

11

12

-1 SD

13

14

15

-2 SD

+1 SD

Lower Regime: Response of Default rate

+2 SD

10

11

12

-1 SD

13
-2 SD

Lower Regime: Response of Default rate

Shock to Short rate

Shock to Default rate

1.5

0.4

1.0

0.2

0.5
-0.0
0.0
-0.2
-0.5
-0.4
-1.0
-0.6

-1.5
-2.0

-0.8
0

+1 SD

6
+2 SD

10
-1 SD

11

12

13

14

15

-2 SD

2
+1 SD

6
+2 SD

10

11

-1 SD

Figure 16. Balke (2000) model. Lower regime. Response of default rate.

61

12

13
-2 SD

Upper Regime: Response of Output

Upper Regime: Response of Output

Shock to Output

Shock to Money

1.5

0.50

1.0
0.25
0.5

0.0

0.00

-0.5
-0.25
-1.0

-1.5

-0.50
0

+1 SD

+2 SD

10

11

12

-1 SD

13

14

15

-2 SD

+1 SD

Upper Regime: Response of Output

+2 SD

10

11

12

-1 SD

13

14

15

14

15

14

15

14

15

-2 SD

Upper Regime: Response of Output

Shock to Short rate

Shock to Default rate

0.20

0.4

0.15

0.2

0.10
-0.0

0.05
-0.00

-0.2

-0.05

-0.4

-0.10
-0.6

-0.15
-0.20

-0.8
0

+1 SD

+2 SD

10

11

12

-1 SD

13

14

15

-2 SD

+1 SD

+2 SD

10

11

12

-1 SD

13
-2 SD

Figure 17. Balke (2000) model. Upper regime. Response of real GDP.

Lower Regime: Response of Output

Lower Regime: Response of Output

Shock to Output

Shock to Money

1.25
1.00

2
0.75
1

0.50
0.25

0
0.00
-1

-0.25
-0.50

-2
-0.75
-3

-1.00
0

+1 SD

+2 SD

10

11

12

-1 SD

13

14

15

-2 SD

+1 SD

Lower Regime: Response of Output

+2 SD

10

11

12

-1 SD

13
-2 SD

Lower Regime: Response of Output

Shock to Short rate

Shock to Default rate

1.00
0.75

2
0.50
1

0.25
0.00

-0.25
-1
-0.50
-2

-0.75
0

3
+1 SD

6
+2 SD

10
-1 SD

11

12

13

14

15

-2 SD

2
+1 SD

6
+2 SD

10

11

-1 SD

Figure 18. Balke (2000) model. Lower regime. Response of real GDP.

62

12

13
-2 SD

Data Description
#

Definition

Source

Unit

Transf.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37

Real GDP
Private Consumption
Govt consumption exp.
Investments
Exports of goods and services
Imports of goods and services
Domestic producer prices - Manufacturing
Domestic producer prices - Industrial Activities
Domestic Producer prices - Investment goods
Domestic Producer prices - Intermediate goods
Domestic Producer prices - Consumer goods
Domestic Producer prices - Durable consumer goods
Domestic Producer prices - Non durable consumer goods
New Orders
Index of Industrial production - Intermediate goods
Index of Industrial production - Investment goods
Index of Industrial production - Durable consumer goods
Index of Industrial production - Non Durable consumer goods
Index of Industrial production - total consumer goods
Index of Industrial production - Intermediate goods
Index of Industrial production - Energy
CPI inflation
CA to GDP
Net trade in goods
Unit labor cost
Labor compensation per employed person
GDP per person employed
Hourly Earnings - Manufacturing
Unemployment rate
Debt to GDP
Deficit to GDP
Durable Consumption
Industrial confidence indicator
Consumer confidence indicator
Retail trade confidence indicator
Construction confidence indicator
Economic Sentiment Indicator
Economic survey: Factors limiting the production. Question 8
None
Demand
Labour
Equipment
Other
Financial
Question 9 Assessment of current production capacity
Question 10 - Duration of production assured by current order-book levels
Question 11 New orders in recent months
Question 12 Export expectations for the months ahead
Question 13 - Current level of capacity utilization
Consumer opinions - Intention to buy a car within the next 12 months
Consumer opinions - Purchase or build a home within the next 12 months
Consumer opinions -Home improvements over the next 12 months
Composite Leading Indicators
Stock index
Excess money = Nominal GDP growth - M3 growth (our estimates)
Real effective exchange rate
Real residential property prices
M1 - Italian contribution
M3 Italian contribution
Short rate
Long rate
Slope = long rate - short rate
Sperad Italian BTP - German Bund
Money Market rate
Bank lending rate: loan to households with mat. Up to 5y
Bank lending rate: loan to households with mat. Up over 5y
Bank lending rate: loan to firms with mat. Up to 5y
Bank lending rate: loan to firms with mat. Up over 5y
Bank lending rate. Loan to households. Average rate
Bank lending rate. Loan to firms. Average rate
Deposit rate

IMF
IMF
IMF
IMF
IMF
IMF
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
ISTAT
IMF
IMF
IMF
IMF
IMF
IMF
IMF
IMF
IMF
IMF
IMF
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
ES-EC
IMF
ES
ES
BIS
BIS
ES
ES
IMF
IMF
IMF
IMF
ES
BoI
BoI
BoI
BoI
BoI
BoI
BoI

2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
2
2
2
2
1
1
1
2
0
0
0
0
0

FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
N
N
N
N
N

0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
2
1
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1

N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD

38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70

Table D1. The data set. Quarterly data spanning from 1992Q1 to 2014Q2, where allowed by sample
availability. IMF = International Monetary Fund, ES = Eurostat, EC = European Commission, BIS =
Bank for International Settlements, BoI = Bank of Italy. 0 = index level, 1 = level, 2 = growth rate. Transf.
is the needed transformation for factor model. N=no transformation, FD=first difference. Variables from
81 to 100 are interpolated with the Chow and Lin (1971) procedure.

Definition

Source

Unit

Transf.

71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100

Spread bank lending rate on loans to households with maturity up to 5 years versus short rate
Spread bank lending rate on loans to households with maturity over 5 years versus short rate
Spread bank lending rate on loans to firms with maturity up to 5 years versus short rate
Spread bank lending rate on loans to firms with maturity over 5 years versus short rate
Bank lending rate. Loan to households. Average rate - minimun rate
Bank lending rate. Loan to firms. Average rate - minimun rate
FX USD/EUR
Dow Jones Eurostoxx financial
Volatility - Eurex Generic 1st RX Future - Implied bond volatility
Brent crude oil 1-month Forward
Bank credit to non financial sector
Bank leverage: Total Debts / (Total Capital + Reserves)
Bank Return on Equity: Net profit / (Total Capital + Reserves)
Bank Return on Assets: Gross Margin / Total Asset
Bank: Operating costs / Gross Margin
Bank: Operating costs / Operating Profit
Bank: Loan loss provisions / Total Loans
Bank: Capital / Total loans
Bank: Capital / Total Asset - Fixed Asset
Bank: Interest Margin / Gross Margin
Bank Liquidity Ratio: (Cash + Securities) / Total Asset
Bank: Total Loans / Total Deposits
Firms: Current Assets / Current Liabilities
Firm Return on Equity: Net profit / (Total Capital + Reserves)
Firm Return on Assets: EBIT / Total Asset
Firm: Financial Charges / EBITDA
Firm: Financial Charges / Financial Debts
Firm Leverage: Total Debts / (Total Capital + Reserves)
Firm: (Total capital + Long-term Liabilities) / Fixed Asset
Firm: Total Capital / Total Asset

BoI
BoI
BoI
BoI
BoI
BoI
ES
ECB
ECB
ECB
ECB
BoI
BoI
BoI
BoI
BoI
BoI
BoI
BoI
BoI
BoI
BoI
Mediobanca
Mediobanca
Mediobanca
Mediobanca
Mediobanca
Mediobanca
Mediobanca
Mediobanca

1
1
1
1
1
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1

FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD
FD

Table D1 (continued). The data set. Quarterly data spanning from 1992Q1 to 2014Q2, where allowed by
sample availability. IMF = International Monetary Fund, ES = Eurostat, EC = European Commission,
BIS = Bank for International Settlements, BoI = Bank of Italy. 0 = index level, 1 = level, 2 = growth
rate. Transf. is the needed transformation for factor model. N=no transformation, FD=first difference.
Variables from 81 to 100 are interpolated with the Chow and Lin (1971) procedure.

64

Factor Model
10

1.00

5
0.75

0.50

-5

0.25
-10

-15

0.00
1995

1998

2001

2004

2007

1st Factor
2nd Factor

2010

2013

10

3rd Factor

20

30

40

50

1st Factor
2nd Factor

60

70

80

3rd Factor

Figure F1. The three factors. Dataset with variables 1 - 80.

15

1.00

10
0.75
5

0.50

-5
0.25
-10

-15

0.00
1996

1998

2000

2002

1st Factor
2nd Factor

2004

2006

2008

2010

2012

20

3rd Factor

40

1st Factor
2nd Factor

60

80

3rd Factor

Figure F2. The three factors. Dataset with variables 1 - 100.

65

100