The Exposure of the Nordic Banking Sector against Global Macroeconomic Factors - A Time Series Study on Probability of Default

Abstract: Business cycles and changes in macroeconomic variables can have a huge influence on the profitability and credit exposure of an individual bank. Consequently, they affect the risk profile of a given bank. This study uses multifactor time series regressions to examine the influence of global macroeconomic variables on the probability of default for Nordic banks, both on industry level and on individual level. Z-scores are used to estimate the probability of default. Quarterly analysis is performed with probability of default as the dependent variable and macroeconomic variables as independent variables. The study is performed for the period from 2000 to 2014. The paper finds that the global macroeconomic variables that have the highest influence on the probability of default for the Nordic banking sector are industrial production and unemployment. The Nordic banking sector is not as homogenous as expected, since the banks are affect- ed by the variables differently.