SPECIAL ARTICLE

Macro Stress Testing of Indian Banking System

Focused on the Tails
Sanjay Singh, S Majumdar, Balwant Singh

This paper investigates system-wide macro stress

testing for credit risk. This paper uses two multivariate
regressions, namely, ordinary least square and quantile
regression to establish a stochastic relationship between
credit quality indicators such as the non-performing
advances ratio or the slippage ratio and macro-variables.
This paper confirms that a slowdown in the economy
along with a firming-up of the interest rate structure is
likely to have an adverse impact on the performance of
the banking sector in terms of the slippage ratio.

The views expressed in the paper are the authors own and not of the
institution to which they belong. This paper was presented in the 49th
annual conference of The Indian Econometric Society held at Patna
University, Patna, Bihar in January 2013.
Sanjay Singh (sanjays@rbi.org.in) is assistant adviser; S Majumdar
(smajumdar@rbi.org.in) is director; and Balwant Singh (bsingh35@
hotmail.com) was formerly principal adviser, Department of Statistics
and Information Management, Reserve Bank of India.

102

1 Introduction

The general perception, especially prior to the global financial

crisis, that the system of institution-level supervision and
financial sector regulation would ensure systemic financial
stability has proved to be a myth. The financial crisis revealed
that the individual financial institutions can behave in a way
that collectively undermines systemic stability. For example,
selling an asset when the price of risk increases may be a prudent response from the perspective of an individual bank.
However, if many banks act in this way, the asset price will collapse, forcing financial institutions to take further steps to
rectify the situation. The responses of the banks themselves to
such pressures lead to generalised declines in asset prices, and
enhanced correlations and volatility in asset markets. Also,
micro-prudential measures are meant to protect consumers by
protecting individual institutions and not to address systemic
issues. Therefore, banking regulators and supervisors have
realised the importance of putting in place macro-prudential
surveillance system to supplement micro-prudential surveillance. In this regard, among the other tools, macro stress tests
are gaining prime importance to assess the vulnerability of the
financial system against extreme but plausible macroeconomic
shocks like a decline in growth, elevated level of inflation,
high interest rates, etc.
While the relation between the macroeconomic conditions
and banking business is relatively well studied, economic theory
is just beginning to understand the linkage between macro
variables and credit risk. The developments in this area indicate the three channelsbroadly relating to the overall asset
and liability position of either banks or their borrowers
which are: (i) the borrower balance sheet channel: any shock
that affects the borrowers net worth will affect their cost of
financing, which will then affect the volume of expenditure
that borrowers ultimately desire to undertake and thereby
affect aggregate demand and also repayment capacity, (ii) the
bank balance sheet channel: adverse shocks to financial sectors balance sheets may lead to a sharp contraction in credit
and result in such shocks having magnified effects on economic activity, and (iii) the liquidity channel: liquidity is the
main determinant of banks ability to extend credit which
affects real economic activities, which will have an impact on
borrowers (BCBS 2011).
As this area of macro stress testing is evolving, the majority
of models which link the macroeconomic condition and credit
risk are non-structural. These models in general establish a
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relationship between the credit quality indicator and macro

variables, and estimate the conditional mean of the credit
quality indicator. However, in their critical review of stresstesting methodologies, Sorge and Virolainen (2006) pointed out
the potential instability of these reduced-form parameter estimates, due to the breakdown in historical patterns, especially
in the tail region. That motivated us to look beyond the conditional mean and estimate the entire conditional distribution of
credit quality on macroeconomic scenarios.
Consistent with the conditional tail focus, the alternative
approach of stress testing is based on a quantile regression
(QR) model, which was propagated by Koenker and Bassett in
1978. Under this approach of stress testing, the relative importance of the macro variables changes according to the level
(that is, quantile position) of credit risk and distribution,
therefore partly addressing the criticism of Sorge and Virolainen about the potential instability of reduced-form parameters. In particular, macrovariables that have a small relative
effect on the mean/median of the distribution may gain relevance in explaining a high quantile of the credit risk indicator.
Against this backdrop, this paper attempts to develop a
macro-stress test for the Indian banking system using quantile
regression. The paper is organised in four sections. Section 2
presents a literature review, Section 3 describes methodological aspects of quartile and quantile regression, Section 4
covers data issues, model specification and empirical results
and finally, conclusions are given in Section 5.

A number of single factor as well as scenario sensitivity analyses have been done in the past for stress tests. One of the common approaches used in IMFWB Financial Sector Assessment
Programmes (FSAPs) for countries are single factor sensitivity
tests. These tests look at the impact of a marked change in one
macro-variable such as the growth, inflation, exchange rate or
the policy interest rate, on banks balance sheets. Though,
these stress tests provide diverse and valuable insights, they do
not take into account the intersection effect of various macroeconomic variables. Another approach for macro stress tests is
to use a macroeconomic model as done in a number of FSAPs
on developed countries. An alternative avenue was proposed
by Boss (2002) for stress test of the Austrian credit portfolio.
This is based on credit portfolio view, which models the
default probability of certain industrial sectors as a logistic function of a sector-specific index, which, in turn, depends on the
current value of a number of macroeconomic variables. The
parameter estimates derived from this model are then used to
assess the future losses on Austrian banks loan portfolios. A
different methodology to assess the impact on the Austrian
banking sector of credit and market risk is applied in Elsinger
et al (2002), which analyses the effect of macroeconomic
shocks on a matrix of Austrian interbank positions. This approach gives the probability of individual bank failures in response to a series of macroeconomic factors, while at the same
time taking into account the effect that these failures have
on the rest of the banking system. Pesaran et al (2004) and
EPW

3 Methodology

Quantile: The -th (in the interval (0, 1)) quantile () of any
random variable Y can be defined as
P(Y < ) t P(Y < )

2 Literature Review

Economic & Political Weekly

Alves (2004) used a VAR model to assess the impact of macroeconomic variables on firms probabilities of default using
variables like the gross domestic product (GDP), consumer prices,
the nominal money supply, equity prices, exchange rates, etc.
Another method has been suggested by Marcucci and
Quagliariello (2005) and Hoggarth et al (2005) which takes
into account a measure of banks fragility directly. Marcucci et al
(2005) attempted to analyse the direct impact of macroeconomic variables as well as the feedback effect from banks fragility to the real sector to the financial sector using the VAR
approach. They found that the default rates follow a cyclical
pattern; they fall in good macroeconomic times and increase
during downturns. Hoggarth et al (2005) have done a similar
exercise for UK and infer a clear and significant negative relationship between changes in output (relative to potential) and
the write-off ratio. Schechtman and Gaglianone (2012) established the macro-credit risk link by the traditional Wilson
(1997a, b) model as well as by an alternative proposed quantile
regression (QR) method, which is given by Koenker and Xiao
(2002) in which the relative importance of the macro-variables
can vary along the credit risk distribution, conceptually incorporating uncertainty in default correlations.

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...(1)

Traditionally, quantiles are calculated by arranging the values of the variable in ascending order and then take the observation at which the threshold is reached. Koenkar and Bassett
(1978) introduced a completely new method to calculate quantiles which is based on an objective function given below,
where the concept of sorting was replaced by optimising:
() =
Q
Y

argmin

|Yi | +

i(i|Yi )

i(i|Yi)

(1)|Yi|

...(2)

In Equation (2) all observations which are greater than the

unknown optimal value, (to be more precise, the absolute
differences between the observations and the optimum) are
weighted with and the observations which are below the optimum are weighted with (1). Though this objective function-based method of calculation of the quantiles seems to be a
little complicated it opened the area of a new statistical tool,
which is quantile regression.
Quantile Regression: Consider a classical linear regression
model,
Yt = xt' + ut

t = 1, 2, T

...(3)

where, conditional expectation of the residual given xt is zero

(that is, E(ut|xt) = 0). Hence, the conditional mean of yt on xt is
given by
E (y t|xt) = x'

...(4)
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SPECIAL ARTICLE

Here, the parameter can be estimated by the least square, as

=

argmin
R K

(y t xt' )2

...(5)

Solution of the above Equation (5) can be given by

= (X' X)1X' y

...(6)

Now let us consider another similar model,

y t = xt' + ut,

t = 1, 2, T

...(7)

Here, in contrast with the classical linear regression model,

the -th conditional quantile of the residual, ut, , on xt is zero
(i e, Q (ut,|xt) = 0). This model (7) is known as the quantile
regression.
Hence, the -th conditional quantile of yt with respect to xt can
be written as
Q (y t|xt) = xt'

...(8)

Assembling Equations (2) and (8), the parameter vector can

be estimated by
=

argmin
R K

{t(t|Ytxt' ) |y t xt' | + t(t|Ytxt' )(1)|y txt' |}...(9)

The above equation can be solved by the linear programming

method. In order to do that, the quantile regression (7) can be
written as a function of only positive elements, as
K

y t = k=1
xtk(1k, 2k,) + t, vt,
with 1k, , 2k, 0, k = 1, 2,...K and t, , vt, 0, t=1,2,n, then
the solution will be reduced to the following problem;
n

1k,, 2k,, t,,vt,

t, + (1)vt,
k=1

Subject to: yt=Kk=1xtk(1k,2k,)+(t,vt,), 1k,,2k,, t,,vt,0(t, k)

Here, in contrast to the classical linear regression model,
for any quantile in the interval (0, 1), the estimated conditional quantile of Y with respect to a regressor matrix X can
be derived by Equation (8) subject to the condition given by
Equation (9). Therefore, by varying the value of , the quantile regression method enables us to evaluate the entire conditional distribution of the regressand. This stands in sharp
contrast to the least squares approach which provides us
only with a single value, namely the conditional mean. This
flexibility of the quantile regression helps to understand
the heterogeneous relationship of the regressand with the
regressor.
4 Data Coverage, Model Specification and Analysis of
the Empirical Results

Data Coverage: Regarding data issues, in the literature two

variables, that is, non-performing advances (NPA) and slippage
ratio,1 are considered as representative of banking sectors performance, which are critically important from the banking
104

and financial stability aspects. Among these, NPA is a stock

variable and reflects the health of the banking sector at any
point of time. This, in fact, is a reflection of the accumulated
effect of the banks performance till the present. The impact of
the existing conditions on the corporate and household sectors
would be to the extent of being incremental in nature. As
against this, the slippage ratioa flow variable which broadly
reflects the changes in the NPA of the banking sector during
the current periodis a reflection of the existing corporate
and households developments. Therefore, using the slippage
ratio in the model is more appropriate as the prime objective of
this study is the analysis of the impact of the existing environment on the banking sector performance.
Regarding interest rates, there could be many candidates for
its representation such as the prime lending rate, benchmark
prime lending rate, base rate, call money rate, repo/reverse
repo rate or even the bank rate, etc. The transmission mechanism of the monetary policy2 in India suggests that changes in
the policy rate, especially that of repo rate/reverse rate, should
entail changes in the overnight call rate thereof on the longrun lending rate of the banks. Changes in the lending rate
should affect the demand for loans consistent with the development in the corporate, agriculture and household sectors,
etc. We consider that to a large extent the changes in the call
money rate are reflected in the loan rates of the banks and, accordingly for this study, we have opted for the call rate as a
representative of the loan rate. As regards the variables representing the developments in the real sector, there could be
various indicators such as overall GDP growth rate, the nonagricultural growth rate, index of industrial production, etc.
Among these there was a major consideration to choose that
variable from the real sector which should be synonymous with
the overall banking sector and the overall economy. In India,
where agricultural output reveals wide seasonality, there was
a view to consider the non-agricultural GDP for our analysis.
This view was, however, discarded as in case of the slippage
ratio, non-performing assets originating in the agricultural
sector formed a sizeable share. Taking account of all these
issues, our study is based on the overall GDP of the economy.
Similarly there are various price measures such as that
based on the wholesale price index (WPI) and consumer price
indices (CPI). Among these, we have selected the WPI as it has a
much broader coverage of the economy than that of CPIs and
being used for measuring general inflation rate while formulating monetary policy. Finally, in order to incorporate the
international economic position and the performance of the
Indian economy in the external sector, the exports to GDP ratio
was also considered.
For this brief study, quarterly data on the above-mentioned variables was taken for the period from March 2002 to March 2012.
The Indian economy was on an accelerated growth path and
growing at a rate which was very close to double digits except
during 2007 when the financial crisis started. Though, India
was not directly affected by the crisis, it did get affected via
indirect channels, namely, trade, external funding and confidence causing a decline in the growth rate of the economy. An
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upward trend was again registered during 2009. Subsequently, the world economy again went into the grip of a sovereign debt crisis which had an adverse impact on the Indian
economy. The adverse domestic economic situations accompanied by the deteriorating international macroeconomic conditions affected the credit quality of the Indian banking system
as measured in terms of the slippage ratio, which started
showing an upward trend from 2010 onwards (Chart 1).

Classical Regression: The classical regression was experimented with the slippage ratio over various lags of the selected
macro variables and based on the sign of the relationship, the
statistical significance of the coefficients and regression diagnostics, the following regression was selected;

Chart 1: Movement of Asset Quality

(in %)

Serial correlation of residuals of the above estimated regression was tested using Q-statistics and the lagrange multiplier
test and it was found that the residuals do not have serial correlation. Further, homoskedasticity of the residuals was tested
using the Autoregressive Conditional Heteroskedasticity test and
it was found that the residuals are homoskedastic. The detailed
results are of this classical regression and diagnostics are
given in Annexure I (p 107). This regression shows that the
improvement in growth and exports will enhance the credit
quality of banks, whereas, a rise in interest rate and inflation
would adversely affect their (banks) asset quality.

3/2011 3/2012

Quantile Regression: While estimating any regression using

quantile regression, the first question which emerges is, what
should be the level of the quantile? The answer for this question depends upon the problem in which it is being used. Here,
as our objective is the project slippage ratio under baseline as
well as stress scenarios, it was decided to estimate that level of
the conditional quantile of the slippage ratio around the latest
prevailing slippage ratio. Here, we have the estimated quantile
regression at 0.80, 0.50 (median) and 0.20 and the regression
results and test statistics of serial correlation of residuals are
presented in Annexures II (p 107), III and IV (p 108), respectively. The direction of the impact of the selected macro-variables on credit quality of banks established by the quantile regression is similar to that observed by classical regression.

Slippage Ratio
5.0

4.0

3.0

2.0

1.0

0.0
3/2002

3/2003 3/2004 3/2005 3/2006 3/2007 3/2008 3/2009 3/2010

Model Specification: The empirics of the study initially involved testing the selected variables for their seasonality and it
was found that the call rate and exports to GDP ratio have significant seasonal components. Hence, these variables were
adjusted for seasonality.
Thereafter, all the selected variables were tested for unit
root. Based on the Augmented Dickey-Fuller (ADF) test, it was
found that except for the exports to GDP ratio, all the variables
were stationary (Table 1). Though, the exports to GDP ratio had
unit root as its p-value was
Table 1: Test of Unit Root: ADF Test
not very high, for modelVariable
t-statistics P-value
ling purpose, the exports
Slippage Ratio (SR)
-3.44 0.02
-3.09 0.03
GDP Growth (GDP)
to GDP ratio was also as-4.66 0.00
Inflation (WPI)
sumed to be stationary.
Call Rate (Call)
-3.14 0.03
As the main objective of
Exports to GDP
this paper is to study the
Ratio (Exp_GDP)
-2.10 0.24
performance of macro
stress test using a quantile regression over the classical regression, a classical regression was first estimated and, subsequently, estimation of a quantile regression was done.

SR=1.770+0.265 * SR1+0.197 * Call3 0.053 * Exp GDP1

0.118 * GDP3+0.061 * WPI

Comparison of Estimator: The movement of the slippage ratio vis--vis its estimated values using classical regression and
three quantile regressions are presented in Chart 2.
It could be discerned from Chart 2 that estimates of the slippage ratio using the classical regression framework move
closely with the conditional quantile at the median level. However, when the slippage ratio is relatively high, the quantile

Chart 2: Slippage Ratio: Actual vs Fitted

(in %)

3.8
3.3

Fitted (QR.80)

Fitted (OLS)

Actual

2.8
2.3
Fitted (QR.20)
1.8
1.3

Fitted (QR.50)

0.8
0.3
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regression at 0.80 gives a closer fit than the Ordinary Least

Squares (OLS). Similarly, when slippage is relatively low,
estimation using quantile regression at 0.20 is better than
the OLS estimate. These observations reveal the importance
of quantile regression over classical regression, especially in
the case of tail risk, because under these circumstances, OLS
will always underestimate the risk and hence undermine
financial stability.
The performance of the quantile regression over OLS was
also tested based on root mean square error (RMSE).3 When
the slippage ratio was under 0.20 quantile, the RMSE of OLS
with quantile regression at 0.20 quantile was compared and it
was found that the efficiency4 of an estimator-based quantile
regression was 238% of the OLS estimator, whereas when the
slippage ratio was above 0.80 quantile, the RMSE of OLS with
quantile regression at 0.80 quantile was compared and here
the efficiency quantile regression over OLS was 162% (Table 2).
Table 2: RMSE of OLS and Quantile Regression Estimator
Method

RMSE
When Slippage When Slippage
Ratio Is
Ratio Is
Below 0.20
Above 0.80
Quantile
Quantile

OLS
Quantile Regression at 0.20 Quantile
Quantile Regression at 0.80 Quantile

0.30
0.12

Efficiency of
Quantile
Regression
over OLS

0.51
0.31

238%
162%

Progression of Coefficients under Various Quantiles: It is

perceived that the impact of macroeconomic conditions on the
asset quality of banks is not invariant of the stats (level) of the
banks assets quality. During the time of tail risk, when the
banking system is already under stress, any macroeconomic
shocks may have a more severe impact than the impact being
Chart 3: Progression of Coefficients of the Quantile Regression
SR (1)

CallRateSA (3)

.8

.8

.4

.4

.0

.0

-.4

-.4

-.8

0.0

0.2

0.4
0.6
Quantile

0.8

1.0

-.8

0.0

0.2

ExportsGDPSA (1)

0.4
0.6
Quantile

0.8

1.0

0.8

1.0

Growth (3)
.1

.1

.0

.0

-.1
-.0

-.2

-.2
-.3

-.3
0.0

0.2

0.4
0.6
Quantile

0.8

1.0

-.4

0.0

0.2

0.4
0.6
Quantile

Inflation
.30

observed during normal

times.
Hence, in order to study
.10
level-varying estimates of
.00
the parameter, a quantile
-0.5
process estimate of quantile
0.0
0.2
0.4
0.6
0.8
1.0
regression was derived and
Quantile
presented in Chart 3. This chart shows that the impact of the
.20

106

selected macro-variables rises as the level (quantile) of the

slippage ratio increases.
Importance of Quantile for Stress Testing

Table 3 indicates the coefficients of the relationship between

the slippage ratio and various macro-variables based on OLS
and quantiles (0.20, 0.50 (median) and 0.80). These results
Table 3: Importance of Macro-variables under OLS as well as various
Quantiles
Macro Variable

Call Rate
Exports to GDP
GDP Growth
Inflation

OLS

QR at 0.20

QR at Median

QR at 0.80

0.197
-0.053
-0.118
0.061

0.137
-0.001
-0.083
0.032

0.200
-0.079
-0.095
0.075

0.357
-0.117
-0.105
0.084

reveal that when slippage ratio is relatively high, the impact

on a rise in interest rate would be almost double those in the
normal periods. A comparison with the OLS-based results indicate that under stress situation, the level of stress being estimated using OLS could be a gross underestimation and hence
the use of quantile-based estimates may be more appropriate.
Further, as the quantile level of the slippage ratio increases,
the impact of macro-variables rises, which shows that the level
of the dependent variable plays a very important role while estimating the relationship between the slippage ratio and macrovariables (Chart 3). Hence, when the slippage is already comparatively high, even a smaller macroeconomic shock may have
a more adverse impact than the relatively bigger macroeconomic
shock observed when it is at its lower level of quantile.
5 Conclusions

In the recent period, the issues of financial stability have

become of paramount importance of central banks across the
globe because financial instability has substantial economic
and social costs. In view of these issues, the focus of the analysis is to quantify the impact of macro-variables, which cause
fragility in the performance of the banking sector and accordingly initiate remedial measures in the case of any eventuality.
To meet these ends, this paper established the relationship of
the slippage ratio with macroeconomic variables using the
classical regression and quantile regression proposed by
Koenker and Bassett (1978). Both the tools being used in this
paper confirm that a slowdown in the economy along with
firming-up of the interest rate structure is likely to have an
adverse impact on the performance of the banking sector in
terms of their slippage ratio.
The merit of the quantile regression over classical regression is that unlike classical regression which always estimates
the conditional mean of the regressand, quantile regression
estimates conditional quantile of regressand and hence helps
to get the entire distribution of the relationship between the
regressand and regressor. The quantile regression is highly
useful in the case of tail risk situations. Where the credit quality of the banking system is already under distress, any macroeconomic shock may have a higher impact on banks performance than during normal times. The findings of this paper
confirm it and shows that as the level of slippage ratio rises,
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that is, its quantile increases, the impact of macro-variables also

becomes larger. The study also suggests that in case the slippage
ratio is already at an escalated level, a rise in the interest rate,
4

Notes
1

The slippage ratio is defined as the ratio of

fresh non-performing advances accrued during
the period to opening standard advances at the
beginning of the period. As the slippage ratio is
publicly available on an annual basis, the slippage ratio on quarterly basis was derived by
calibrating annual slippage ratio based on position of y-o-y non-food credit growth of the respective quarters (with one quarter lag) with
respect to March quarter. A speech by K C
Chakrabarty, Deputy Governor, Reserve Bank
of India Two Decades of Credit Management
in Banks: Looking Back and Moving Ahead, at
BANCON 2013, says that Slippagesbetter
metric to assess credit management.
A speech by Deepak Mohanty, executive director, Reserve Bank of India, Money Market and
Monetary Operations in India at the Seminar
on Issues in Financial Markets, Mumbai, 15 December 2012 said that ..the overnight call
rate, which was used implicitly as operating
target since the institution of liquidity adjustment facility (LAF) in 2000, became explicit
after the adoption of a new operating procedure in May 2011.
n (Actual Observed )2)
RMSE = (1ni=1
i
i

References
Alves, I (2004): Sectoral Fragility: Factors and Dynamics, mimeo, ECB.
BCBS (2011): The Transmission Channels between
the Financial and Real Sectors: A Critical Survey
of the Literature, Working Paper No 18, BIS.
Boss, M (2002): A Macroeconomic Credit Risk
Model for Stress Testing the Austrian Credit
Portfolio, Financial Stability Report 4, Oestereichische Nationalbank.
Dirk, Schoenmaker (2011): The Role of Central
Banks in Financial Stability, Encyclopedia of
Financial Globalization.
Elsinger, H, A Lehar and M Summer (2002): Risk
Assessment for Banking Systems, Oestereichische Nationalbank Working Paper No 79.
Hoggarth, Glenn, Steffen Sorensen and Lea Zicchino (2005): Stress Tests of UK Banks Using a
VAR Approach, Working Paper No 282, Bank
of England.
IMF (2009): Global Financial Stability Report,
April.
Marcucci, Juri and Quagliariello Mario (2005): Is

Dependent Variable: SR
Coefficient

SR (-1)
CallSA(-3)
ExportsGDPSA (-1)
Growth (-3)
Inflation
C
R-squared
Adjusted R-squared

0.264946
0.196648
-0.053349
-0.118075
0.060701
1.770134
0.633540
0.579649

Std Error

Prob

0.153259
0.094185
0.057576
0.027077
0.042918
0.547755

0.0929
0.0444
0.3607
0.0001
0.1664
0.0027

Correlogram of Residuals
Autocorrelation

.|. |
.*| . |
.|. |
.*| . |
.*| . |
**| . |
.|. |
. |*. |

Heteroskedasticity Test: ARCH

F-statistic
0.672939
Obs*R-squared
6.069449

Prob F(8,23)
Prob Chi-Square(8)

0.7100
0.6395

Test Equation:
Dependent Variable: RESID^2
Variable

C
RESID^2(-1)
RESID^2(-2)
R-squared
Adjusted R-squared

Coefficient

Std Error

Prob

0.230163
-0.309825
-0.353121
0.189670
-0.092184

0.110570
0.200369
0.207519

0.0487
0.1357
0.1023

Annexure II: Quantile Regression (at 0.80)

Partial Correlation

.|.
.*| .
.|.
.*| .
.*| .
***| .
.*| .
.|.

|
|
|
|
|
|
|
|

1
2
3
4
5
6
7
8

AC

PAC

Q-Stat

Prob

0.063
-0.112
-0.050
-0.174
-0.154
-0.310
-0.020
0.150

0.063
-0.116
-0.036
-0.185
-0.149
-0.369
-0.090
-0.018

0.1723
0.7247
0.8391
2.2512
3.3957
8.1573
8.1777
9.3606

0.678
0.696
0.840
0.690
0.639
0.227
0.317
0.313

Breusch-Godfrey Serial Correlation LM Test:

F-statistic
0.298677
Prob F(2,32)
Obs*R-squared
0.733009
Prob Chi-Square(2)

0.7438
0.6932

Test Equation:
Dependent Variable: RESID
Variable

SR (-1)
Call SA (-3)
ExportsGDPSA (-1)
Growth (-3)
Inflation
C
RESID (-1)
RESID (-2)

Bank Portfolio Riskiness Procyclical?: Evidence from Italy Using A Vector Autoregression, Discussion Papers in Economics, No
2005/09, University of York.
Koenker, R and G Bassett (1978): Regression Quantiles, Econometrica, 46(1).
Koenker, R, and Z Xiao (2002): Inference on the
Quantile Regression Process, Econometrica, 70 (4).
Niel, Schulze (2004): Applied Quantile Regression: Microeconomatric, Financial and Envornmental Analyses, Inaugural-Dissertation, Tubingen.
Pesaran, M H, T Schuermann, B J Treutler and S M
Weiner (2004): Macroeconomic Dynamics
and Credit Risk: A Global Perspective, Wharton Financial Center Working Paper, pp 313.
Schechtman, Ricardo and W P Gaglianone (2012):
Macro Stress Testing of Credit Risk Focused
on the Tails, Journal of Financial Stability, 8,
17492.
Sorge, M and K Virolainen (2006): A Comparative
Analysis of Macro Stress Testing Methodologies with Application to Finland, Journal of
Financial Stability, 2, 11351.
Wilson, T (1997a): Portfolio Credit Risk (I), Risk,
September, 11117.
(1997b): Portfolio Credit Risk (II), Risk, October, 5661.

Efficiency of quantile regression over OLS was

calculated as the ratio of RMSE of OLS to RMSE
of quantile regression.

Annexure I: Classical Linear Regression

Variable

even of relatively low magnitude, could have adverse consequences for the banking sector performance, having negative
implications for the stability of the banking sector.

Variable

Coefficient

Std Error

Prob

SR (-1)

0.058182

0.153855

0.7077
0.0001

CallSA (-3)

0.357019

0.076949

ExportsGDPSA (-1)

-0.117467

0.065394

0.0813

Growth (-3)

-0.105430

0.049117

0.0391

Inflation

0.084050

0.047712

0.0871

2.162409

0.841839

0.0148

Pseudo R-squared
Adjusted R-squared

0.500860
0.427458

Correlogram of Residuals
Autocorrelation

Coefficient

Std Error

Prob

-0.030185
0.005360
-0.003037
-0.004502
0.000361
0.111943
0.095866
-0.109703

0.209461
0.073143
0.061333
0.042754
0.041489
0.918470
0.254421
0.189578

0.8863
0.9420
0.9608
0.9168
0.9931
0.9038
0.7088
0.5669

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Dependent Variable: SR
Method: Quantile Regression (tau = 0.8)

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Partial Correlation

AC

PAC

Q-Stat

Prob

0.247

0.247

2.6224

0.105

0.011

-0.053

2.6275

0.269

0.056

0.071

2.7687

0.429

-0.008

-0.042

2.7715

0.597
0.701

. |** |

. |** |

.|. |

.|. |

.|. |

.|. |

.|. |

.|. |

.*| . |

.|. |

-0.068

-0.057

2.9961

**| . |

**| . |

-0.221

-0.208

5.4011

0.493

.|. |

.|. |

-0.040

0.073

5.4837

0.601

.|. |

.|. |

0.049

0.038

5.6075

0.691

107

SPECIAL ARTICLE
Annexure III: Quantile Regression (0.50(Median))

Annexure IV: Quantile Regression (0.20)

Dependent Variable: SR
Variable

Coefficient

Std Error

Prob

SR (-1)

0.418087

0.143788

0.0064

CallSA (-3)

0.200033

0.060011

0.0021

ExportsGDPSA (-1)

-0.078869

0.053496

0.1496

Growth (-3)

-0.095449

0.041188

0.0266

Inflation

0.074780

0.033542

0.0325

1.348996

0.721127

0.0700

Pseudo R-squared
Adjusted R-squared

0.440985
0.358777

Test of Serial Correlation

Dependent Variable: SR
Method: Quantile Regression (tau = 0.2)
Variable

Coefficient

Std Error

Prob

SR (-1)

0.271935

0.119976

0.0299
0.0065

CallSA (-3)

0.136562

0.047127

ExportsGDPSA (-1)

-0.000483

0.048712

0.9921

Growth (-3)

-0.082609

0.037357

0.0338

Inflation

0.032330

0.024455

0.1950

0.988617

0.647052

0.1358

Pseudo R-squared

0.384231

Adjusted R-squared

0.293677

Test of Serial Correlation

Autocorrelation Partial Correlation

AC

PAC

Q-Stat

Prob

Autocorrelation

Partial Correlation

AC

.|. |

.|. |

-0.013

-0.013

0.0073

0.932

. |*. |

. |*. |

.*| . |

.*| . |

-0.143

-0.143

0.9117

0.634

.|. |

.|. |

.|. |

.|. |

-0.002

-0.007

0.9120

0.823

. |*. |

. |*. |

.*| . |

.*| . |

-0.148

-0.172

1.9338

0.748

.|. |

.*| . |

.*| . |

.*| . |

-0.155

-0.170

3.0901

0.686

.*| . |

.*| . |

**| . |

***| . |

-0.270

-0.357

6.6893

0.351

.|. |

.*| . |

-0.007

-0.138

6.6918

0.462

. |*. |

.|. |

0.158

-0.022

7.9962

0.434

**| . |
.|. |
. |*. |

**| . |
.|. |
. |*. |

6
7
8

PAC

Q-Stat

Prob

0.188

0.188

1.5297

0.216

0.020

-0.016

1.5478

0.461

0.103

0.105

2.0249

0.567

-0.064

-0.107

2.2132

0.697

-0.107

-0.076

2.7596

0.737

-0.242
-0.046
0.093

-0.234
0.063
0.108

5.6585
5.7664
6.2160

0.463
0.567
0.623

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