Understanding the response of Indian banks to macro-economic shocks: a strategy perspective

Abstract

The vulnerability of banks to macroeconomic and financial shocks is an area of growing interest to policymakers, especially in emerging markets. Strong adverse aggregate shocks contribute heavily to loan losses when banks are highly exposed to such shocks. I intend to understand the heterogeneity in Indian bank risk responses to macro shocks. Based on the work of Buch et al. (2010), I intend to discuss how macro factors effect bank risk. Using Factor augmented VAR model, I will allow macroeconomic factors to affect bank risk, when macroeconomic factors themselves are modelled as a function of banking variables. We examine if discriminating strategies impact risk responsiveness of Indian commercial banks to macro-economic shocks using Factor augmented VaR approach for quarterly periods during 2002-13.