Macro Credit Risk Stress Testing in Tanzanian Banking Sector: A Global Vector Autoregressive (GVAR) Approach

ABSTRACT

This study conducted a macro credit risk stress testing framework for assessing the impact of global transmissions on Tanzania’s banking sector from Q12006 to Q42020, using the Global Vector Autoregressive Regression (GVAR) model with seven countries. The adoption of the GVAR model enabled us to take into account non-linear relationships, capture business cycle effects and the global interaction. This study focused on assessing the projected responsiveness of Tanzania’s credit risk to shocks originating from domestic, global and foreign variables in relation to USA, China and South Africa. This study found that the global transmissions have an impact on the Tanzanian banking sector, with a significant exposure witnessed from the increase in the crude oil price index. On a domestic level, the results revealed that projected inflation rate shocks have a more responsive impact on banking sector credit risk compared to real GDP growth. In addition, GDP growth shocks from foreign countries have a slight impact on the banking sector compared to exchange rate risk transmission, given the growing global interconnectedness, thus leading to a spillover effect on the banking sector. Conclusively, Tanzania’s banking sector is not invulnerable to domestic, foreign and global shocks, and therefore warrants monitoring to enhance resilience.

KEYWORDS:

• banking sector
• credit risk
• macro stress test
• global shock
• GVAR
• Tanzania

Acknowledgments

The authors gratefully acknowledge the valuable contribution from Lukman Oyeyinka Oyelami, Ph.D, Lecturer at University of Lagos and Postdoctoral Research Fellow Nigerian Institute of Economic and Social Research.

Disclosure statement

While one of the authors is an employee of the Bank of Tanzania (BOT), the views expressed in this article are those of the authors and do not necessarily represent the views of the BOT, its Executive Board, or BOT management.

Data availability statement

The data is from a proprietary source therefore it cannot be made available in open source. However, the data can be obtained from the authors on the request.

Additional information

Funding

There is no funding for the project.