Impact of Macroeconomic Shocks on the Individual Banks: Case of Madagascar

Abstract

The successive financial crises have highlighted the interdependence between the financial system and the real economy. Prudential measures to limit the negative repercussions of the financial crisis, through the Basel I and Basel II agreements, have shown their limits and the Basel III agreements have consequently integrated the macro-prudential component which aims to ensure the stability of the financial sector as a whole within the economy. The financial stability assessment tool known as the “stress test” has also been developed in various forms and its application to the financial sector, particularly the banking sector, is strongly recommended by the Bank for International Settlements. Indeed, the purpose of this study is to assess the resilience of the Malagasy banking sector to macroeconomic shocks and to evaluate its impact on the capitalization of the banking system through the macroeconomic stress test tool. To do so, we used a dynamic panel model. Non-performing loan forecasts are used to obtain capital projections at both the banking system and bank levels under adverse scenarios. The results show that most banks were able to hold capital above the minimum regulatory threshold of 8% under Basel III standards. However, only one bank fails to meet the minimum capital adequacy threshold. Non-performing loan forecasts are used to obtain capital projections at both the banking system and bank levels under adverse scenarios.