Systematic and Unsystematic Determinants of Sectoral Risk Default Interconnectedness.

Area of Science:

• Banking and Financial Economics
• Risk Management
• Development Economics

Background:

• Financial stability is critical, especially in credit risk management during uncertain economic periods.
• Understanding sectoral credit risk default interconnectedness is vital for developing economies.
• Existing research often overlooks the interplay of macroeconomic, bank-specific, and household factors on sectoral defaults.

Purpose of the Study:

• To investigate the key determinants influencing the interconnectedness of sectoral credit risk defaults in developing countries.
• To analyze the impact of macroeconomic indicators, bank-specific variables, and household characteristics on sectoral default risk.
• To provide empirical evidence for enhancing credit risk management strategies in emerging markets.

Main Methods:

• Employed a dynamic credit risk model incorporating macroeconomic, bank-specific, and household data.
• Utilized the seemingly unrelated regression (SURE) model for empirical analysis.
• Examined the interrelationships between various factors and sectoral default risk.

Main Results:

• Macroeconomic determinants were found to have a limited significant influence on sectoral default risk.
• Higher levels of household education were associated with decreased interconnectedness of sectoral loan defaults.
• Increased bank profitability and specialization significantly reduced sectoral loan defaults.

Conclusions:

• Household education and bank-specific factors (profitability, specialization) are crucial in mitigating sectoral credit risk interconnectedness.
• Macroeconomic factors play a less dominant role than anticipated in driving sectoral default risk.
• Findings offer insights for policymakers and financial institutions to strengthen financial stability in developing countries.