Analyzing Macroeconomic Variables and Stress Testing Effects on Credit Risk: Comparative Analysis of European Banking Systems

Abstract This study provides a comparative analysis of European banking systems, focusing on how macroeconomic factors influence non-performing loans (NPLs) to evaluate bank credit risk from 2008 to 2022. Using the Cross-Sectional Autoregressive Distributed Lag (CS-ARDL) model, the research examines both short-term and long-term relationships between NPLs and key macroeconomic indicators, such as inflation, GDP growth, public debt, and unemployment rates. Additionally, macroeconomic stress tests are incorporated to assess the impact of economic shocks on default risk and analyze the sensitivity of NPL rates to changes in these macroeconomic determinants. The empirical results indicate that inflation and unemployment significantly affect NPLs across European banking institutions. Furthermore, the analysis of stress scenarios reveals that European banks, particularly those in Italy and Germany, have been notably impacted by both the financial crisis and the recent pandemic crisis of 2020. Policymakers and governments must take necessary precautions to mitigate the consequences of adverse scenarios and support banks in managing credit risk to maintain financial market stability.