Inter-portfolio credit risk contagion including macroeconomic and financial factors: A case study for Ecuador

Daily banking practice suggests that there may be contagion effects between portfolios, a fact that has been explicitly recognized through current regulation. This paper describes a model that distinguishes between delinquency in each portfolio and allows inter-portfolio credit risk contagion, including macroeconomic and financial factors. Also, multivariate scenarios regarding portfolios' credit risks were simulated. The private banking system of Ecuador was explored from January 2005 to December 2018. Delinquency among consumers, microcredit, and housing portfolios and their exogenous determinants were simultaneously quantified using a Bayesian vector autoregressive model. The results show that shocks in exogenous variables are often transmitted immediately in all portfolios. Simultaneously, the autoregressive terms take up to six months to affect these variables, but not cumulatively. A unit of shock in consumer delinquency causes an increase in microcredit delinquency immediately, and this effect is maintained until one month later, where it stabilizes and disappears at the tenth month. Furthermore, a unit of shock in microcredit delinquency produces an increase in consumer delinquency only in the medium term, after seven months. Including inter-portfolio linkages in credit, risk quantification allows to understand the micro-dynamics of absolute risk better and to evaluate the systemic importance of individual shocks since their impact spreads among portfolios with a domino effect. Further research in this area might focus on how to use these techniques as operational tools to incorporate financial stability considerations into control risk policy decision-making. (C) 2021 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.