Sectoral Shocks and Loan Losses: The Case of a Small Open Economy

Sectoral Shocks and Loan Losses: the Case of a Small Open Economy

One of the most common precursors of bank failures in economies where the traditional commercial banking model is dominant is a rising ratio of non-performing loans to total assets- the banks’ NPL ratio.  This paper utilises panel data techniques over a two-decade span in an attempt to examine the determinants of bank loan losses in the Barbadian economy. The results from the panel techniques are used to examine and compare the differing impacts of sectoral shocks, individual bank managerial decisions and general economic shocks on bank loan losses. The results are especially intriguing in light of the slump in the Barbados’ economy and have broad implication for the stability of that country’s banking industry.