The Influence of Macroeconomic Risks on Credit Risk in the Serbian Banks’ Loan Portfolio

Banking sectors in central, eastern and southeastern European (CESEE) countries have gone through a transformation from state-ownership and central planning to private ownership and market-oriented decision making during the first decade of the 21st century. However, financial markets in these countries are still developing and the private sector is highly exposed to changes in exchange rates, especially in terms of the balance sheet channel. The fact that these banking sectors are predominantly owned by eurozone banks makes them vulnerable to macroeconomic tensions in the European union. This analysis investigates macroeconomic determinants of the realisation of credit risk in the loan portfolio of banks in Serbia using a panel data set covering the period from 2008Q3 to 2012Q2. Three different panel methods were applied separately for loans to households and loans to enterprises. The results indicate that a deteriorating business cycle and exchange rate depreciation led to the worsening of the quality of banks’ loan portfolio in Serbia in the period under review. In addition, statistical evidence indicates that the CPI inflation additionally affected the quality of loans. Furthermore, we find that household loan portfolios are also sensitive to changes in the short-run interest rates. As for policy implications, the importance of international cooperation between regulators is rising. A very important topic for such cooperation should be the risk-taking channel between countries with significant differences in interest rates and degree of riskiness. The interrelationship between the exchange rate and credit risk should be a major focus of both domestic macro- and micro-prudential policy – banks should be motivated to pay more attention to the possible negative spillovers when making credit decisions. Also, further development of the domestic primary and secondary T-bills market would help reducing unhedged FX risks.