Analysis of tail dependence between sovereign debt distress and bank non-performing loans

Li Liu, Yu Min Liu, Jong Min Kim, Rui Zhong, Guang Qian Ren

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We investigate the tail dependence between sovereign debt distress and bank non-performing loans (NPLs) using a large sample of developed and emerging countries in recent decades. Considering the feedback loop of sovereign debt and bank loan distress, we use three copula models to analyze the asymmetry of tail dependence structure between sovereign debt exposure and bank NPLs. We use the Gaussian copula marginal regression to control the concurrent impact of other macroeconomic variables. We provide evidence that sovereign debt indicates an important determinant of NPLs. We also find that there is tail dependence between sovereign debt distress and bank NPLs, whereas the tail dependence coefficients vary across countries. Our findings shed light on the influence of fiscal distress on bank loan distress and provide immediate implications for the design of macro prudential and financial policy.

    Original languageEnglish (US)
    Article number747
    JournalSustainability (Switzerland)
    Volume12
    Issue number2
    DOIs
    StatePublished - Jan 1 2020

    Bibliographical note

    Funding Information:
    Funding: This research was funded by National Natural Science Foundation of China Grant (nos. 71702171, 71672182, U1604262).

    Funding Information:
    This research was funded by National Natural Science Foundation of China Grant (nos. U1904211, 71702171, 71672182, U1604262).

    Keywords

    • Gaussian copula regression
    • Non-performing loans
    • Sovereign debt distress
    • Tail dependence

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