Accepted Manuscript

The impact of oil price movements on bank non-performing loans:

Global evidence from oil-exporting countries

Osamah M. Al-Khazali, Ali Mirzaei

PII: S1566-0141(17)30178-4
DOI: doi: 10.1016/j.ememar.2017.05.006
Reference: EMEMAR 504
To appear in:
Received date: 20 May 2016
Revised date: 23 February 2017
Accepted date: 2 May 2017

Please cite this article as: Osamah M. Al-Khazali, Ali Mirzaei , The impact of oil price
movements on bank non-performing loans: Global evidence from oil-exporting countries,
(2016), doi: 10.1016/j.ememar.2017.05.006

This is a PDF file of an unedited manuscript that has been accepted for publication. As
a service to our customers we are providing this early version of the manuscript. The
manuscript will undergo copyediting, typesetting, and review of the resulting proof before
it is published in its final form. Please note that during the production process errors may
be discovered which could affect the content, and all legal disclaimers that apply to the
journal pertain.
 ACCEPTED MANUSCRIPT

The impact of oil price movements on bank non-performing loans: Global

evidence from oil-exporting countries
Osamah M. Al-Khazali*
American University of Sharjah
Finance Department
kazali@aus.edu

and

PT
Ali Mirzaei
American University of Sharjah

RI
Finance Department
amirzaei@aus.edu

SC
Abstract
NU
It is generally believed that economic and financial performance in oil-rich countries are
interlinked to oil price movements. On this assumption, we consider whether oil prices
shocks have any impact on bank non-performing loans (NPLs), and if so, whether the effect
MA

is homogenous across banks. This paper addresses these questions by applying a dynamic
GMM model on data from 2310 commercial banks in 30 oil-exporting countries over the
period 2000-2014. Three main results emerge. First, changes in oil prices do have a
significant impact on bank NPLs: A rise (fall) in oil prices is associated with a decrease
D

(increase) in NPLs. Second, oil prices shocks have asymmetric effects on bank problem
loans, with negative oil price movements generally have a greater impact than positive oil
E

price movements. Third, the unfavourable impact of adverse oil prices shocks on the quality
of bank loans tends to be more pronounced in large banks. Overall, these robust results
PT

favour the adaptation of appropriate macroprudential policies and diversification of the

economy, in order to mitigate the adverse impact of oil prices shocks.
CE

Key words: Oil price movements; bank NPLs; oil-exporting countries

JEL: E32, E44, G21
AC

*Corresponding author

Acknowledgement: The authors would like to thank the School of Business and
Administration of the American University of Sharjah for funding this
research project.

1
 ACCEPTED MANUSCRIPT

1. Introduction
Oil prices fluctuate over time in response to changes in world oil demand and supply
conditions, geopolitical turbulences, and changes in institutional arrangements (Sadorsky,
2004 and 2008). For instance, during the period 2000-2014, oil prices went up and down by
as much as $128 per barrel. These fluctuations in oil prices have a serious impact on firms’
performance in oil-exporting countries, since economic and financial performance in these

PT
countries are interlinked with oil price variations. Increases in oil prices lead to higher oil
earnings and thus higher government spending. This in turn fosters corporate performance,
stock prices and bank balance sheets. This oil-macro-financial connection indicates that

RI
during oil price upturns, bank asset quality tends to rise (IMF, 2015), as the quality of bank

SC
loan portfolios is closely related to companies’ performance.

Oil price downturns, on the other hand, can of course adversely affect businesses in
NU
oil-rich economies and thus impede many firms’ ability to pay interest and principal, which
leads to some defaults. This is because lower oil income leads to lower government spending,
MA

affecting the private sector unfavourably (through contracts with government agencies). Falls
in oil prices would also increase risk premiums for the country and the cost of capital
accordingly, further diminishing economic activity (Husain et al. 2015). Thus, following
D

decreases in oil prices, the poor performance of companies in oil-exporting countries affects
E

their ability to meet financial commitments, such as the repayment of bank loans. As a result,
PT

one would expect adverse movements in oil prices to raise default rates on loans and thus
bank non-performing loans (NPLs) to increase, reducing banking financial stability. In a
CE

recent study, the IMF (2015) shows that this is indeed the case; in oil-rich Arab countries, a 1
percent decrease in oil prices leads to about a 0.1 percentage point increase in the bank NPL
AC

ratio.

While there is a large volume of work on the association between oil price shocks and
corporate performance (e.g. Henriques and Sadorsky, 2008; Dayanandan and Donker, 2011;
and Elyasiani et al., 2011, among others), there is little empirical evidence on how
movements in oil prices affect bank NPLs. Thus, this paper aims to fill this gap. We address
three important questions: (i) do oil prices shocks affect bank NPLs in oil-exporting
countries? (ii) Is there an asymmetric effect between positive and negative oil prices shocks?
And (iii) do large banks respond to oil prices shocks differently to small banks?

2
 ACCEPTED MANUSCRIPT

To address these research questions, we use a dataset covering a sample of 2310

commercial banks1 in top 30 oil-exporting countries over the period 2000-2014. Building on
the emerging literature on oil-macro-financial linkages and using a proper dynamic panel
regression, we analyse the impact of oil price shocks on bank NPLs, while controlling for its
other micro and macro determinants. The high dependency of energy-exporting countries to
oil income on the one hand and instability of world energy prices on the other hand, make
these economies a good laboratory for testing the extent to which oil price shocks influence

PT
bank NPLs. In most of these economies, oil revenues continue to account for a large share of
GDP and export income. During 2001-2013, oil exports represented, on average, about 25
percent of GDP in these top 30 oil-exporting countries (Fig. 1), although with significant

RI
variations across countries. Dependence on hydrocarbon revenues for these economies even

SC
increased over this period (Fig. 2). For instance, the share of oil revenue in GDP increased
from about 12% in 2001, to more than 17% in 2008, and the share of oil revenue in total
NU
exports revenue jumped from about 34% in 2001 to more than 46% in 2008, although the
recent financial crises constrained these trends.
MA

[Insert Fig. 1 & 2 around here]

We contribute to the literature in several respects. First, we examine how oil price
movements affect bank NPLs in a panel of oil-exporting countries. The effect of oil price
D

shocks on the financial stability of banks has not received much scrutiny. In fact, very few
E

studies have looked at the effect of oil price changes on the financial stability of banking
PT

firms in oil-dependence countries (Miyajima, 2016; Khandelwal et al. 2016). Besides, these
few studies are country (or regional) -specific and therefore do not provide a global
CE

perspective. Second, we are the first to examine the asymmetric effect between positive and
negative oil price shocks on bank NPLs. An increase in the oil price is unlikely to improve
AC

the economy and consequently reduce bank NPLs in oil-rich economies in the same way that
a price decrease can dampen the economy and increase bank NPLs. Third, we differentiate
the effect of oil prices shocks on banks according to their sizes (large versus small). It is
argued that the quality of a bank loan portfolio can be affected by bank size (Salas and
Saurina, 2002). We contribute to such arguments by investigating how different sizes of bank
respond to movements in oil prices. Finally, the financial stability of banks is of considerable
interest to policy makers, because the banking sector plays an important role in today’s

1
Our use of bank-level data allows us to examine whether the relationship between oil prices and NPLs differs
across banks, and to link such differences to bank size.

3
 ACCEPTED MANUSCRIPT

economy and the stability of the banking sector is an important driver of economic growth
(Jokipii and Monnin, 2013; Levintal 2013). One dimension of bank health is based on its
performance and the quality of any assets it possesses. A major threat to the asset portfolio
quality is an increase in NPLs. Therefore, by examining the relation between oil prices and
NPLs, we also advance our knowledge about the financial stability of banking systems and
show their potential vulnerability to external shocks, specifically global oil prices.

Three main results emerge from our empirical section. First, changes in oil prices

PT
have a significant impact on bank NPLs; a rise (fall) in oil prices is associated with a decrease
(increase) in bank NPLs. Second, oil prices shocks have asymmetric effects on bank problem

RI
loans, with negative oil price movements generally have a greater impact than positive oil
price movements. Third, the unfavourable impact of adverse oil prices shocks on the quality

SC
of bank loans tends to be more pronounced in large banks. These results, which are robust to
a range of additional tests, indicate that in oil-exporting countries, the quality of bank loan
NU
portfolios declines following adverse oil price movements, making banks financially instable,
and that the relationship is strongest for large banks.
MA

Our results have important policy implications. First, they suggest a need to adopt
macroprudential policies that alleviate the potential threat of oil price shocks on the financial
stability of banks. For instance, by implementing countercyclical capital and liquidity buffers
D

during favourable times (when oil prices are increasing), banks domiciled in oil-dependent
E

countries would be more resilient during oil price downturns (IMF, 2015). Effective
PT

macroprudential instruments can reduce the credit booms episodes and the likelihood that
booms terminate unfavourably (Dell’Ariccia et al. 2012). This would make banks less
CE

vulnerable to adverse oil price shocks, especially in resource-based economies where

hydrocarbon revenues stimulate economic growth, although such receipts are subject to
AC

fluctuations in global energy prices (Prasad et al. 2016). Second, our findings also emphasize
economic diversification, in order to mitigate the opposing impact of oil price volatility (IMF,
2016). For example, by liberalizing their financial sector and encouraging more international
capital inflows, oil-exporting countries would attract a greater private and foreign investment,
which provide alternatives for government spending. This renders corporate sector
performance less susceptible, making banks more resilient to falls in international oil prices.
In fact, by attracting more foreign funds and hence diversifying the sources of funds for
domestic firms, oil-dependent economies would make their banking sector more elastic to oil
price movements.

4
 ACCEPTED MANUSCRIPT

The remainder of the paper is organized as follows. Section 2 provides a brief

literature review and develops our hypotheses. Section 3 discusses the empirical model and
further introduces different measures of oil price shocks. This section also provides the data.
Section 4 discusses the empirical findings, and Section 5 concludes.

2. Literature review and hypotheses development

2.1. Literature review
Our paper is linked to the empirical studies on bank asset quality and on oil-macro-financial

PT
linkages. In this regard, our study is related to three strands of the literature. First, it adds to
those studies that investigate the association between oil price movements and corporate

RI
stock prices or investment, which usually find an adverse relationship (e.g. Huang et al. 2005;
Basher and Sadorsky, 2006; Boyer and Filion, 2007; Hammoudeh and Choi, 2007;

SC
Bachmeier, 2008; Henriques and Sadorsky, 2008; Apergis and Miller, 2009; Dayanandan and
Donker, 2011; Elyasiani et al., 2011, and Henriques and Sadorsky, 2011; among others).
NU
Some of these studies also examine whether the impact of oil price shocks on stock prices is
heterogeneous across firm sizes. Sadorsky (2008), for example, tests a sample of 1500 firms,
MA

and finds that the relationship between oil price shocks and stock prices is indeed different
across firm sizes. Medium-sized firms are found to be more adversely affected by changes in
oil prices. Narayan and Sharma (2011) also report that firm stock returns respond to oil price
D

movements differently, according to size. We extend these studies (i) by investigating how
E

the impact of changes in oil prices on non-financial firm performance are transmitted to the
PT

quality of bank loans. We find that in oil-exporting countries, an increase in oil prices reduces
bank NPLs, probably because of its positive effect on firm growth and performance, which
CE

enhances their ability to repay debt. And (ii) by examining the heterogeneity of the impact of
oil price shocks across banks. Our results indicate that large banks tend to be more vulnerable
AC

to adverse oil prices shocks than small banks.

Our paper is also closely related to a couple of studies that examine the impact of oil
prices on bank performance. Poghosyan and Hesse (2009) investigate the effect of oil price
shocks on the performance of banks in oil-exporting countries in MENA over the period
2000-2011.They find that oil prices have a significant impact on bank profitability through
country-specific macroeconomic and institutional variables. A recent paper by Khandelwal et
al. (2016) investigates the relationship between world oil price fluctuations and financial
developments in the GCC countries. They find strong links between oil price movements and
bank balance sheets. Miyajima (2016) also finds that a lower growth rate of oil prices is

5
 ACCEPTED MANUSCRIPT

associated with a rise in the bank NPL ratio in Saudi Arabia. We compliment these studies by
investigating from a global perspective how changes in oil prices affect bank NPLs in oil-
exporting countries.

Finally, our paper is linked to prior studies on the (macro) determinants of bank
NPLs. They usually report the important role of both bank-specific and macroeconomic
factors in determining bank NPLs. Salas and Saurina (2002) investigate the NPLs of Spanish
commercial and savings banks and find that credit risk is determined by bank-specific

PT
variables, such as net interest margin, bank size and capital adequacy, in addition to macro
variables such as real GDP growth. Jiménez and Saurina (2004) highlight the role of

RI
collateral, the bank-borrower relationship, and lender type on the probability of bank loan
default. Glen and Mondragón-Vélez (2011) find that bank loan loss provisions are explained

SC
by bank capitalization, credit to the private sector, and GDP growth. Louzis et al. (2012) find
that macroeconomic variables and management quality are associated with the bank NPLs of
NU
each loan class (business, consumer, and mortgage). See also Espinosa and Prasad (2010),
Nkusu (2011), Beck et al. (2013), Love and Ariss (2014), Ghosh (2015) and Zhang et al.
MA

(2016), who all also emphasize the importance of macroeconomic variables in determining
bank NPLs. Overall, our study contributes to this strand of literature by highlighting oil prices
as another key determinant of bank NPLs in oil-exporting countries. Understanding the oil
D

price dynamics is important, as oil prices are now acknowledged as the key source of
E

macroeconomic risk in these countries (Barkoulas et al. 2012).

PT

In summary, this paper contributes to the above literature by: (i) investigating the
relationship between oil price shocks and bank NPLs in oil-exporting countries from a global
CE

perspective using detailed bank-level data; (ii) addressing the potential heterogeneity effects
of oil price movements on different sizes of banks, and (iii) by analysing whether oil price
AC

increases and decreases have asymmetric effects on bank NPLs.

2.2. Hypotheses development

Oil price movements can affect firms’ performance in different respects. Researchers have
highlighted two channels through which oil price shocks are transmitted to the real sector
(Hamilton, 2008; Scholtens and Yurtsever, 2012; and Tsai, 2015). First, an increase in oil
prices leads to higher input costs and thus higher marginal production costs, thus affecting
firms’ earnings. Furthermore, energy usage will decline following a rise in oil prices, which
in turn lowers productivity growth and subsequently firms’ output. This channel is referred to

6
 ACCEPTED MANUSCRIPT

as supply-side shock. The second channel is that the prices of goods and services increase
with higher energy prices, and hence, household demand for output will decrease,
consequently affecting firm performance. This channel is referred to as demand-side shock.
These two transmission channels of oil price shocks to the real economy seem to apply to oil-
importing countries. However, for oil-exporting countries, the trend is thought to be the
opposite: positive (negative) oil prices shocks increase (decrease) firm value through both
channels2.

PT
Given that oil-exporting countries rely heavily on oil revenue as one of their main
sources of income, an increase in oil price returns could positively affect their economy.

RI
When oil prices increase, oil-exporting counties enjoy a revenue surplus, and this leads to an
increase in GDP, current account balances, gross federal revenue and foreign reserves. For

SC
example, Bruckner et al. (2012) argue that increases in oil prices raise GDP growth more in
countries with considerable net oil exports. Under these circumstances, investment and
NU
subsequently output will increase, leading firms to perform better. Higher oil prices also
enhance access to external finance, increasing investment and growth, which consequently
MA

improve corporate profits. Furthermore, an income transfer from oil-importing economies to

oil-exporting economies causes households demand for goods and services to increase, which
in turn raises output. Collectively, in oil-exporting economies, through both supply and
D

demand channels, the financial position of firms tends to be strengthened, and consequently,
E

the position of banks with substantial claims on these firms will improve. However, these
PT

developments will reverse when oil prices decline, negatively affecting the financial position
of corporates, and consequently their capacity to repay bank loans, thus leading to high
CE

NPLs. In other words, in downturns, declines in government and businesses revenue reduce
the ability to meet debt obligations, inevitably increasing bank NPLs.
AC

Nevertheless, the impact of oil price movements on bank NPLs could be

heterogeneous across banks, depending on bank size. One might argue that large banks have
more resources, a greater monitoring capacity, and sufficient power to force firms to repay
loans during difficult phases and hence, they may be more resilient to adverse oil price

2
We acknowledge that there are also other channels through which oil price changes materialize in the banking
sector in oil-exporting countries. For example, oil price shocks could directly affect bank lending to oil
companies or increase excess liquidity in the banking system (Poghosyan and Hesse, 2009). Also, positive oil
price shocks raise credit to the real sector, improving financial accessibility for firms. This strengthens the
financial position of non-financial firms, which in turn decreases loan defaults risk. Yet, Poghosyan and Hesse
(2009) find empirically that the impact of oil prices on bank performance in oil-rich economies is driven mainly
indirectly by changes in economic activities following changes in oil prices.

7
 ACCEPTED MANUSCRIPT

shocks3. In addition, large banks in developing countries are usually stated-owned banks, and
hence governments may increase their resilience by, for example, capital injection. On the
other hand, small banks, which are usually private, are generally more efficient, innovative
and have less bureaucratic management structures. Therefore, they may be less vulnerable to
the poor performance of non-financial firms following oil price shocks. In this regard,
Sadorsky (2008) investigates the effect of oil prices on stock prices for different firm sizes,
and concludes that medium-sized firms are more sensitive to oil prices changes.

PT
Overall, we expect an association between oil price movements and bank NPLs in oil-
exporting economies, but with heterogeneous effects across banks. This leads our hypotheses

RI
to be as follows:

SC
H1: Oil price movements affect bank NPLs in oil-exporting countries.

H1a: The effects of oil price shocks on NPLs are heterogeneous across banks.
NU
3. Methodology and Data
3.1. Methodology
MA

Negative oil price shocks can lead to significant losses for banks located in oil-dependent
countries, by reducing the credit quality of loan portfolios and thus increasing NPLs. To
examine econometrically how oil price movements affect bank NPLs, we follow the
D

approach of previous studies (Salas and Saurina, 2002; Louzis et al. 2012; Love and Ariss,
E

2014; Dimitrios et al. 2016) by adopting a dynamic panel regression of the form:
PT

𝑁𝑃𝐿𝑖𝑐𝑡 = 𝛽0 + 𝛽1 . 𝑁𝑃𝐿𝑖𝑐𝑡−1 + 𝛽2 . 𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑡 + 𝛽3 . 𝐶𝑟𝑖𝑠𝑖𝑠𝑡 + ∑ 𝛿𝑙 . 𝑋𝑙,𝑖𝑐𝑡 + ∑ 𝛾𝑚 . 𝑌𝑚,𝑐𝑡

𝑙 𝑚
CE

+ 𝜀𝑖𝑐𝑡 (1)
where 𝑖, 𝑐 and 𝑡 denote bank 𝑖 in country 𝑐 at time 𝑡. The dependent variable is bank non-
performing loans to total gross loans (𝑁𝑃𝐿𝑖𝑐𝑡 ), which is a common proxy of bank credit risk
AC

and thus bank financial stability, and employed in most studies including those mentioned
above. As alternatives to NPLs, we also use the ratios of bank loan loss provisions to total
gross loans (𝐿𝐿𝑃) and bank loan loss reserves to total gross loans (𝐿𝐿𝑅). 𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑡 is a
vector of oil price return indexes in year 𝑡. A priori, increases in oil prices are expected to
enhance the performance of non-financial firms and thus reduce bank NPLs. 𝐶𝑟𝑖𝑠𝑖𝑠𝑡 is a

3
From a financial crisis perspective, large banks, compared to small ones, are subject to more exposure to risky
market-based activities, lower capital buffers and more fragile funding, and hence are more vulnerable to
financial crises (Laeven et al. 2016). Thus, it is also interesting to see whether they are more or less resilient to
oil prices shocks.

8
 ACCEPTED MANUSCRIPT

dummy variable that takes the value one for the global crisis period 2008-2010, and zero
otherwise.

𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛 is an index for oil price returns, which we will shortly introduce different
measures. In addition to oil return indexes, we also use nine bank-specific control variables
(𝑋𝑙 ) that are thought to affect bank NPLs (see e.g. Salas and Saurina, 2002). According to the
literature, the CAMEL4 components are highly associated with bank loan portfolio quality.
Therefore, the first variable that we include in the model is the ratio of equity to total assets

PT
(Equity ratio), as a proxy for bank capital adequacy. Banks with more capitalization face a
lower risk of bankruptcy and hence have more ability to develop business and deal with risks.

RI
The second variable is bank asset growth (Asset growth), as a proxy for bank asset quality.
One might expect that a bank with a higher growth rate of its assets would be more profitable,

SC
due to the additional business generated. The third variable is a proxy for bank inefficiency
(Inefficiency), calculated as the ratio cost to income. We use this variable for the quality of
NU
bank management, as low efficiency is a signal of poor management practices in loan
allocation and monitoring. Inefficiency is expected to be positively associated with bank
MA

NPLs and profitability. The fourth variable is a proxy for bank earnings. Here, we use net
interest margin (NIM) as a proxy of earnings on traditional activities. The fifth variable is
bank liquid assets to total assets (Liquidity), which capture a bank’s liquidity position.
D

Financial institutions may raise their liquid holdings in order to reduce their risk. Overall, we
E

expect healthy banks, as measured by the above indicators, to have lower NPLs.
PT

Furthermore, we use the log of bank total assets (Size) to control for bank size, which
is included to account for existing economies or diseconomies of scale in the market. We
CE

include a five-firm concentration ratio (Concentration) to account for market concentration.

According to the structure-conduct-performance (SCP) hypothesis, more concentration
AC

implies greater market power in generating profits, and hence lower NPLs. A proxy for bank
fund diversification (Diversification) is also included. We expect more diversified banks to
have lower NPLs. Finally, to capture the effect of non-traditional bank activities on bank
NPLs, we use the ratio of off-balance-sheet to total assets (Off-balance).

We also include four macroeconomic variables (𝑌𝑚 ) that tend to influence bank
NPLs. As in Beck et al. (2013) and Glen and Mondragón-Vélez (2011), we add real GDP
growth (GDP growth) and the inflation rate (Inflation) into the model to account for
4
CAMEL is an acronym for five measures: capital adequacy, asset quality, management soundness, earnings
and liquidity.

9
 ACCEPTED MANUSCRIPT

macroeconomic conditions. NPLs are expected to decrease (increase) in good (bad) times.
Two other variables are domestic credit to private sector (Credit) and trade (Trade). The
former is included to capture the financial development of a country and the latter to account
for international interconnections.

We now turn to measuring oil price returns. We follow Poghosyan and Hesse (2009)
in defining four indexes for oil price returns. The first index (𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼) is the average
annual growth rate, which is calculated as

PT
𝑙𝑜𝑔(𝑝𝑡,𝑗 )
∑365
𝑗=1 [ ] ∗ 100
𝑙𝑜𝑔(𝑝𝑡−1,𝑗 )
𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝑡 = (2. 𝑎)
365

RI
where 𝑝𝑡,𝑗 is the oil spot price for year 𝑡 on day 𝑗. This is a simple arithmetic mean of daily

SC
12-month growth rates of the spot price.
The second proxy (𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝐼) is the deviation of oil prices from their expected value. The
NU
𝑓
12 month forward rate (𝑝𝑡 ) is used as a proxy for expected values for oil prices.

𝑙𝑜𝑔(𝑝𝑡,𝑗 )
∑365
𝑗=1 [ ] ∗ 100
MA

𝑓
𝑙𝑜𝑔 (𝑝𝑡−1,𝑗 )
𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝐼𝑡 = (2. 𝑏)
365
While oil price movements are expected to have an impact on bank NPLs, it is also
D

possible that the relationship is asymmetrical. It is argued in the literature that oil price
E

increases tend to have a considerably greater effect on economic activity than oil price
PT

decreases (Balke et al. 2002; Hooker, 2002; Cunado and Perez de Garcia, 2003; Hamilton
and Herrera, 2004; Sadorsky, 2008)5. For example, Davis and Haliwanger (2001) find that
CE

more jobs are destroyed following positive oil price shocks than are created in the wake of
adverse oil price shocks. Sadorsky (2008) also finds that oil price shocks have an asymmetric
AC

impact on stock prices, with positive oil price shocks having a substantial impact on stock
returns than negative oil price shocks. Thus, following Hamilton (2003) and Poghosyan and
Hesse (2009), we measure net oil price increases (𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑢𝑝) and net oil price decreases
(𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑑𝑜𝑤𝑛) as follows:
∑365
𝑗=1 𝑚𝑎𝑥[0, 𝑝𝑡,𝑗 − 𝑚𝑎𝑥(𝑝𝑡−1,𝑗 )]
𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑢𝑝𝑡 = (2. 𝑐)
365
∑365
𝑗=1 𝑚𝑖𝑛[0, 𝑝𝑡,𝑗 − min(𝑝𝑡−1,𝑗 )]
𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑑𝑜𝑤𝑛𝑡 = (2. 𝑑)
365
5
Researchers have highlighted the role of monetary policy responses, financial pressure, and adjustment costs as
an explanation for the existence of asymmetry (Jones et al., 2004; Sadorsky, 2008).

10
 ACCEPTED MANUSCRIPT

Eq. (2.c) and (2.d) help us in testing the asymmetric effect between positive and negative oil
price shocks (Tsai, 2015), respectively. Note that, according to Sadorsky (2008), in Eq. (1),
asymmetrical oil price components are established by separating oil price returns into a
separate time for positive oil price returns (𝑜𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑢𝑝) and a separate time series for
negative oil returns (𝑜𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑑𝑜𝑤𝑛).
Table 1 provides a definition and source of all variables used in this study.
[Insert Table 1 around here]

PT
3.2. Data
Data on bank NPLs and other bank-level variables are from Bankscope. Bank data are from a

RI
panel of 30 countries that share a common characteristic of exporting a significant amount of
oil, according to the World Factbook. We restrict our analysis to commercial banks only, in

SC
order to have homogenous banks for which one major component of loans is business loans,
and hence the performance of debtor firms matter for bank loan quality. We use data from
NU
consolidated accounts if available, and from unconsolidated accounts otherwise, so as to
avoid double-counting. In this way, we arrive at a sample of 2310 banks. The sample period
is 2000-2014, chosen because of the sample period is based on the fact that during these 15
MA

years, oil prices fluctuated significantly, enabling us to construct both positive and negative
shocks. In addition, this period includes both pre- and post-global financial crisis phases. Our
D

sample is diverse in terms of income groups and geographical areas. In terms of the number
E

of banks per country, banks from Russia, the U.K. and Brazil dominate the sample dataset,
while Equatorial Guinea, Congo and Southern Sudan are the countries with the minimum
PT

number of banks. Table A1 ranks the top 30 oil-exporting countries and also reports the
number of banks and NPLs country-wise.
CE

Furthermore, data for spot oil prices are from the U.S. Energy Information
AC

Administration. Following Tsai (2015), we use the West Texas Intermediate (WTI) crude oil
price in Cushing, Oklahoma to estimate oil price returns. The WTI spot prices usually serve
as reference prices for pricing crude oil and derivative products. The nearest crude oil futures
contract, which is the most widely traded oil futures contract in the world, is also used as a
proxy for future prices (Sadorsky, 2008). Finally, macroeconomic data are from the World
Bank (World Development Indicators and Financial Development Indicators). Table 2
provides descriptive statistics for all variables used in this study.

[Insert Table 2 around here]

[Insert Fig. 3 around here]

11
 ACCEPTED MANUSCRIPT

Fig. 3 plots the daily WTI crude oil price, in dollars per barrel, over the period 2000-
2014. The oil price was remarkably cheap (around 17-37 dollars per barrel) during 2000 and
2001. However, since 2002, oil prices began to experience a steady upward trend, which
became more rapid since 2006. A record peak of around 145 dollars was reached in July
2008, after which the price of crude oil dropped sharply to approximately 30 dollars in
December of the same year, following the inception of the global financial crisis. Since the
end of 2008, oil prices increased significantly, with some fluctuations, until roughly the end

PT
of 2013. This upward trend was probably because of expectations of global economic
recovery and high consumption. However, oil prices have declined notably since then,
because of geopolitical turbulences in the Middle East and a declining demand for crude oil,

RI
mainly from China.

SC
[Insert Fig. 4 around here]
Fig. 4 shows bank NPLs (non-performing loans to total loans ratio) over the period
NU
2000-2014 for all banks and for the different types of banks (large and small). The credit
quality of loan portfolio across oil-exporting countries was high and remained relatively
stable during period 2000-2001. The bank NPLs declined dramatically from 2001 until the
MA

financial crisis hit the global economy in 2007-2008. Since then, average bank quality has
deteriorated significantly, due to the global economic recession. In addition to such a trend,
D

we also observe that large banks, compared to small ones, have low NPL ratio.
E

Comparing both oil price movements (Fig. 3) and bank NPLs (Fig. 4), we observe
PT

that interestingly, as oil prices increase (decrease), bank NPLs in oil-exporting countries
decrease (increase). And this is the case for both large and small banks.
CE

[Insert Fig. 5 around here]

Finally, Fig. 5 exhibits the dynamics of the four oil return measures discussed above
AC

(𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼, 𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝐼, 𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑢𝑝, 𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑑𝑜𝑤𝑛) over the period 2000-2014.
The figure shows that the proposed indicators point in the same direction, in terms of oil price
shocks. For example, they suggest that there were adverse returns on oil prices in 2001, 2009
and 2014, but positive returns in other years, such as 2008 and 2010.
4. Results
4.1. Baseline results
A central issue in our empirical model specification is potential reverse causality. For
example, it is highly likely that a bank’s NPLs would affect its net interest margin, its asset
growth or economic activities. In addition, the dependent variable is highly persistent over

12
 ACCEPTED MANUSCRIPT

time, and there are also probably correlations amongst some of the regressors specified in the
model. Thus, following previous studies (Dimitrios et al. 2016), we control directly for
endogeneity issues, using the Generalized Method of Moments (GMM) estimator proposed
by Arellano and Bond (1991). We use a lag of both explanatory variables and explained
variable as instruments. To check whether the instruments are good, we apply the Sargan test
of over-identifying restrictions. If we fail to reject the null hypothesis, we conclude that the
instruments are good. It is also necessary to assume that the error terms of regression are not

PT
second-order serially autocorrelated. Failing to reject the null hypothesis of no secondary-
order autocorrelation supports this assumption6 7. Furthermore, the presence of unit roots in
the series is examined using the Fisher Phillips-Perron (PP) and the Fisher Augmented

RI
Dickey-Fuller (ADF) tests. We use these panel unit root tests, as they do not require a

SC
balanced panel sample (Nkusu, 2011; Love and Ariss, 2014). We find that both PP and ADF
tests reject the null hypothesis that series are non-stationary for all in-level variables, except
NU
two that are rejected at first difference8. Given these results and following Miyajima (2016),
we assume all variables to be stationary. Yet, in a robustness test, we check whether our main
results still hold when including the first difference of these two variables.
MA

[Insert Table 3 around here]

Returning to our results, Table 3 reports the baseline regressions. We present the
D

output of eight regressions (Columns 1-8) for four indicators of oil price movements
(𝑜𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼, 𝑜𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝐼, 𝑜𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑢𝑝, 𝑜𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑑𝑜𝑤𝑛), depending on whether we
E

include only bank-specific control variables (Control 1) or include both bank-specific and
PT

macroeconomic control variables (Controls 1 & 2). The Sargan test cannot be rejected at the
conventional level in all regression, confirming the validity of the instrument variables.
CE

Moreover, the AR(2) suggests that in neither regression are there secondary-order
autocorrelations.
AC

In the first model, the estimated coefficient on the oil price return (𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼),
when calculated using spot oil prices, is negative and statistically significant at the 1% level,

6
In addition, following Ghosh (2015), we use a lagged dependent variable (NPLs) to account for the persistence
of NPLs. Note that lag two does not appear to be positive and hence we use only a one-year lag. Even so, we
report the results, when using first and second lags, as a robustness test.
7
Correlation coefficients between oil return indicators and control variables were found to have a maximum of
0.43 (between oil return I or II and GDP growth), and between controls themselves -0.45 (between bank size
and bank equity ratio).
8
For reasons of brevity, we do not report the results, but they are available from the authors upon request.

13
 ACCEPTED MANUSCRIPT

suggesting that rising oil prices decrease bank NPLs. Moreover, the estimated coefficient on
this variable, when including macroeconomic variables in model 2, is also negative and
statistically highly significant, further supporting to the argument that increases in oil prices
dampen bank NPLs in oil-exporting countries. Models 3 and 4 present the results of oil price
return (𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝐼), when computed using forward rates. We find that an increase in oil
prices is associated with a decline in bank NPLs, regardless of whether or not we control for
macroeconomic variables. The estimated coefficients on 𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝐼 are all negative and

PT
statistically significant at the 1% level.

The results so far indicate that the effect of oil price returns on bank credit risk is

RI
negative and significant, regardless of the definition of oil price returns, possibly because of
the better performance of non-financial firms during “oil price upwards” (due to the boost in

SC
economic activity triggered by favourable oil price movements), which accordingly enhances
bank financial stability. Overall, our robust result suggests that oil prices certainly matter for
NU
bank NPls in oil-exporting countries that depend largely on oil revenue. Our results support
the findings of recent studies suggesting that there are oil-macro-financial linkages in oil-
MA

dependent economies (e.g. IMF, 2015; Khandelwal et al. 2016; Miyajima, 2016), but from a
global perspective using bank-level data.

The effects of oil price movements on the quality of bank loans are economically
D

relevant. For example, referring to Table 3 (Columns 2), it can be seen that the coefficient
E

estimate of oil price return (𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼) implies that a one-standard deviation decrease in
PT

𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼 (21.865) increases the bank NPL ratio by 39.4%, with all other explanatory
variables set at their mean values. This suggests that bank loan quality in oil-exporting
CE

countries deteriorates during a period of significant decline in oil prices, as evident in recent
years. Similarly, the coefficient estimate of oil price return (𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝐼) in Column 4
AC

indicates that a one-standard deviation decrease in 𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐼𝐼 (21.934) translates into a
39.5% decrease in bank NPLs, holding all other explanatory variables constant at their
means.

Models 5-8 break the oil return variable down into a component for positive returns
(𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑢𝑝) and a component for negative returns (𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑑𝑜𝑤𝑛). The estimated
coefficients on 𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑢𝑝 (Columns 5-6) are negative and statistically significant at the
1% level, while the estimated coefficients on 𝑂𝑖𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑑𝑜𝑤𝑛 (Columns 7-8) are positive
and statistically significant at the 5% level. A Wald statistic testing the hypothesis that oil

14
 ACCEPTED MANUSCRIPT

return up movements are symmetric to oil return down movements (Column 5 or 6 vs.
Column 7 or 8) is rejected (p value is 0.00)9. It is clear that oil prices have asymmetric effects
on bank NPLs in oil-exporting countries experiencing negative oil price movements, which
have a greater impact on NPLs than positive oil price movements (Model 8 versus Model 6).

Regarding control variables10, we find several interesting results. First, the recent
financial crisis adversely affected the credit quality of banks’ loan portfolios, probably due to
the global economic recession. Second, we find that more capitalized banks have better loan

PT
portfolio quality, suggesting that costly capital equity may force banks to allocate funds to
healthy and profitable projects, hence decreasing default risk. Third, growing banks have

RI
lower NPLs, indicating that asset growth may lead to a lower bank NPL ratio. Fourth, banks
located in countries where banking systems are more efficient have lower NPLs, suggesting

SC
that better managed banks have, on average, better loan quality portfolios. Fifth, a higher net
interest margin ratio, higher liquidity ratio and larger size are associated with a higher NPLs
NU
ratio. Sixth and on the macroeconomic level, as GDP growth or domestic credit in a country
increase, its banking system NPLs decreases, suggesting that firms located in countries with
MA

high GDP growth or in financially developed economies are in a better situation to repay
bank loans. Finally, the impacts of other control variables were not found to have a
significant impact. Overall, we find that apart from oil prices, most bank-level and macro
D

variables are significant determinants of the quality of loan portfolios in oil-exporting

E

countries, which supports the findings of previous studies (e.g. Salas and Saurina, 2002;
PT

Klein, 2013; Love and Ariss, 2014).

In summary, our baseline results presented in Table 3 show that there is statistically
CE

significant evidence that oil price movements have an impact on bank NPLs in oil-exporting
countries. An increase (decrease) in oil prices is associated with lower (higher) bank NPLs.
AC

There is also statistically significant evidence of asymmetric oil price effects, where adverse
shocks have a bigger impact than positive shocks.

[Insert Table 4 around here]

Table 4 reports the results of using bank loan loss provisions to total loans (LLP) and
bank loan loss reserves to total loans (LLR) as dependent variables. Both these two indicators

9
To apply the Wald test, we simultaneously enter both the oil returns up and down variables into the model and
then check the equality of coefficients.
10
Note that there is strong persistence in the ratio of NPLs across all models, as expected.

15
 ACCEPTED MANUSCRIPT

are good alternatives for bank NPLs, as they also capture the quality of bank credit risk, and
have been employed in some previous studies11. Models 1-4 show the results where the
dependent variable is LLP. It is clear from columns 1-2 that the impact of oil price
movements on bank NPLs is negative and statistically highly significant, suggesting that as
oil prices increase, banks loan loss provisions in oil-exporting economies decrease. Models 3-
4 show that oil return up has a negative impact on bank LLP, while oil return down has a
positive impact. The impact of oil prices on bank LLP is asymmetric, where negative oil

PT
price shocks have a considerable effect on bank LLP than positive oil price shocks.

Models 5-6 also report the impact of oil price movements on bank LLR. We find that

RI
the impacts of oil price return variables are again negative and statistically significant at the
1% level. A 1% increase in oil prices leads banks’ LLR in oil-exporting countries to decline

SC
by about 1.7%. In addition, the estimated coefficients in Models 7-8 suggest that oil prices
up (down) causes bank LLR to decrease (increase). Finally, bank LLR rises more following
NU
declines in oil prices, than their declines following rises in oil prices, confirming an
asymmetric effect.
MA

Overall, the estimated coefficients on the oil price return variables, presented in Table
4, provide further support for our hypothesis that falling (increasing) oil prices dampen
(improve) the quality of bank loan portfolios in oil-exporting countries, and that the effect is
D

not symmetric between positive and negative returns.

E
PT

4.2. Heterogeneous impacts

[Insert Table 5 around here]
CE

Do oil price movements exert the same effect on the NPLs of large and small banks?
Theoretically, bank size may matter in response to macroeconomic shocks. On the one hand,
AC

large banks, which are normally more exposed to external shocks, are more bureaucratic and
complex, and are less innovative, and hence tend to be more susceptible to oil prices shocks.
On the other hand, one might argue that because of more resources, capacity and diversity,
large banks are in fact less vulnerable. To examine this hypothesis, we divide our dataset into
two groups: large versus small banks. We call a bank large, if its total assets exceed 5 billion
dollars, and small otherwise.

11
For instance, Love and Ariss (2014) used loan loss reserve instead of the NPL ratio to analyse loan portfolio
quality in Egypt, and Glen and Mondragón-Vélez (2011) applied loan loss provisions.

16
 ACCEPTED MANUSCRIPT

Table 5 reports the results. Models 1-4 show the results for large banks, while Models
5-8 show the results for small banks. In general, oil price movements have similar effects on
the NPLs of small and large banks: positive (negative) oil price returns are associated with a
decrease (increase) in bank NPLs in oil-exporting economies. However, oil return up has a
positive impact on bank loan portfolio quality only in small banks. In addition and
surprisingly, the impact of oil price return down also has a heterogeneous impact. While large
banks are vulnerable to adverse oil price shocks, small banks tend to be resilient. This may

PT
indicate that when oil prices fall, small firms in oil-exporting countries adjust their costs more
efficiently than large firms, placing them in a better position to repay their loans than is
usually the case for small banks. In addition, large firms which are mostly listed, have limited

RI
access to capital markets following negative oil price shocks and this restricts their ability to

SC
repay their loans. The results also reveal that oil return up movements are symmetric to oil
return down movements in both large and small banks. It appears that, in oil-exporting
NU
economies, small banks benefit most from positive oil price shocks and large banks lose most
from negative oil price shocks.
MA

Overall, NPLs in small banks decreases as a result of positive oil price shocks.
However, we find that they do not respond in substantially to adverse oil market shocks.
These relationships are reversed in large banks, suggesting a greater vulnerability of large
D

banks in oil-exporting countries to adverse changes in oil prices. In fact, we find that the
E

significant effect of adverse oil price shocks is mainly channelled through large banks.
PT

4.3. Robustness checks

In this sub-section, we conduct an array of robustness tests to ensure that our main findings
CE

are not driven by the choice of dataset, explanatory variables, or the econometric
specifications.
AC

[Insert Table 6 around here]

First, we examine whether our baseline results still apply if we exclude Islamic banks
from the dataset. It might be argued that the way NPLs are computed in Islamic banks is
different to those from conventional banks. Table 6, Panel A presents the results.
Furthermore, we exclude oil-rich advanced economies (Australia, Canada, Norway and the
UK) from our dataset. Banks in these economies might operate under different regulations
and within a different environment, and hence may behave differently to oil-price shocks than
their counterparts in developing countries. Table 6, Panel B presents the results. In both
cases, the results of excluding Islamic banks and advanced economies support the key

17
 ACCEPTED MANUSCRIPT

findings of our baseline analysis, that increases (decreases) in oil prices decrease (increase)
bank NPLs in oil-rich economies12.

Next, to explore in greater detail the effect of oil prices shocks on bank NPls, we
include in the model a set of new additional explanatory variables that might affect it. This
includes the unemployment rate, exchange rate and interest rate. According to the literature,
these macro variables may effect bank NPLs (e.g. Chaibi and Ftiti, 2015). Higher rates of
unemployment indicate a decline in firm production, as well as a decrease in household

PT
income, which affect their ability to repay bank loans (Castro, 2013). An appreciation of the
local currency makes local goods and services more expensive. This influences export-

RI
oriented firms and hence affects their ability to meet their financial obligations (Nkusu,
2011). Also, higher real interest rates could affect bank NPLs positively, as, following

SC
increases in interest rates, the cost of capital will increase, which negatively affect firm
performance. The data for these variables are obtained from the World Bank. Table 6, Panel
NU
C shows the results. Again, our main results still prevail when including this set of new
variables; a negative (positive) oil price shock increases (decreases) bank NPLs.
MA

Furthermore, we confirm the robustness of our results to different choices of

econometric modelling. Specifically, in our baseline regression, we examined the linear
relationship between oil prices and bank NPLs. We now examine a non-linear relationship.
D

Table 6, Panel D reports the results. We find that there is some evidence (although not
E

statistically highly significant) in the form of a U-shape relationship between oil price
PT

increases and bank NPLs. This may support our previous findings regarding asymmetric oil
price effects. Furthermore, we include two lags of the dependent variable instead of one lag.
CE

Table 6, Panel E reports the results, showing that our previous findings still hold. In addition,
we now check whether including the first difference (instead of the level) of those two
AC

variables (𝐶𝑜𝑛𝑐𝑒𝑛𝑡𝑟𝑎𝑡𝑖𝑜𝑛 and 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑐𝑟𝑒𝑑𝑖𝑡) that were found to be stationary for the
first difference, affect our main findings. Table 6, Panel F reports the results, indicating that
our core results remain intact.

Finally, we examine whether the characteristics of the financial system (financial

development and financial structure) of a country are linked to the relationship between oil
prices and bank credit risk. Following Igan and Tan (2015), we define financial development
as the sum of stock market capitalization and private credit, in percent of GDP. In addition,
12
Note that the regression results for control variables are not reported in this section for the sake of brevity.
However, they are available from the authors.

18
 ACCEPTED MANUSCRIPT

we define financial structure (whether the system is bank- or market-based) as the ratio of
stock market capitalization to private credit. The thresholds for financial development, in
terms of more or less developed, and for financial structure, whether bank- or market-based,
are the median of these ratios. Table 6, Panel G reports the results when we exclude
financially developed countries, and Panel H reports the results when we exclude market-
based economies. We find that the relationship between energy prices and bank NPLs still
holds. Specifically, banks located in financially less developed countries and/or in bank-

PT
based economies are vulnerable to the oil price shocks.

RI
5. Conclusion
The recent substantial decline in oil prices has underscored the consequences that adverse oil

SC
price shocks can have on bank performance in oil-exporting countries. While there is an
extensive literature investigating the relationship between oil price changes and corporate
NU
stock prices, there is little about how oil price movements can affect banks’ financial
stability, as measured by bank NPLs. Increases in NPLs not only affect the stability of
MA

banking systems, but also reduce economic activity and thus impair social welfare. In
addition, there is no evidence on whether the potential vulnerability of banks to oil prices
shocks is homogenous across banks. In this study, we investigated this link between oil prices
D

shocks and bank NPLs.

E

We applied a dynamic GMM estimator on a panel data of 2310 banks in 30 oil-

PT

exporting countries over the period 2000-2014. The empirical results show that increases
(decreases) in oil prices reduce (enlarge) bank NPLs. In addition, changes in oil prices have
CE

an asymmetric effect on bank NPLs; rises in oil prices have a different impact than declining
oil prices. Negative shocks have a greater impact than positive shocks. However, oil price
AC

movements exert different effects on the NPLs of large banks as opposed to small banks.
While large banks are generally vulnerable to adverse oil price shocks, small banks tend to be
benefit more from positive oil prices shocks.

Our findings indicate the existence of oil-macro-financial linkages in oil-exporting

countries, with the quality of banks loan portfolios being influenced by changes in oil prices,
which affect bank financial stability. Our results call for effective macroprudential policies
(for instance, countercyclical capital and liquidity buffers), having a diversified economy (for
example, promoting non-oil sectors), and improving the climate for foreign investment

19
 ACCEPTED MANUSCRIPT

(especially access to finance), which may all help in alleviating the adverse impact of oil
price shocks, making corporates, and consequently the banking system, more resilient to oil
price volatility. Another implication of these results is the need for policy makers to
recognize that adverse oil prices shocks impact heterogeneously across banks.

References

PT
Apergis, N., Miller, S.M., 2009. Do structural oil-market shocks affect stock prices? Energy
Economics 31, 575–595

RI
Arellano, M., Bond, S., 1991. Some tests of specification for panel data: Monte Carlo
evidence and an application to employment equations. Review of Economic Studies 58
(April (2)), 277–297.

SC
Bachmeier, L., 2008. Monetary policy and the transmission of oil shocks. Journal of
Macroeconomics 30, 1738–1755.
NU
Balke, N.S., Brown, S.P.A., Yucel, M.K., 2002. Oil price shocks and the US economy:
Where does the asymmetry originate? Energy Journal 23 (3), 27–52.
MA

Barkoulas, J., Chakraborty, A., Ouandlous, A., 2012. A metric and topological analysis of
determinism in the crude oil spot market. Energy Economics 34, 584–591.

Basher, S.A., Sadorsky, P., 2006. Oil price risk and emerging stock markets. Global Finance
D

Journal 17 (2), 224–251.

E

Beck, R., Jakubik, P. and Piloiu, A. 2013. Non-performing loans: What matters in addition to
PT

economic cycles? European Central Bank. Working Paper No. 1515.

Boyer, M.M., Filion, D., 2007. Common and fundamental factors in stock returns of
CE

Canadian oil and gas companies. Energy Economics 29, 428–453.

Bruckner, M., Ciccone, A., Tesei, A., 2012. Oil price shocks, income and democracy. Review
AC

of Economics and Statistics 94 (2), 389–399.

Castro, V., 2013. Macroeconomic determinants of the credit risk in the banking system: The
case of the GIPSI. Economic Modelling. 31, 672–683.

Chaibi, H., Ftiti, Z., 2015. Credit risk determinants: evidence from a cross-country study.
Research in International Business and Finance 33, 1–16.

Cunado, J., Perez de Garcia, F., 2003. Do oil price shocks matter? Evidence for some
European countries. Energy Economics 25, 137–154.

Davis, S.J., Haltiwanger, J., 2001. Sectoral job creation and destruction response to oil price
changes. Journal of Monetary Economics 48, 465–512.

20
 ACCEPTED MANUSCRIPT

Dayanandan, A., Donker H. 2011. Oil prices and accounting profits of oil and gas companies.
International Review of Financial Analysis 20 (5), 252–257.

Dell’Ariccia, G., Igan, D., Laeven, L., Tong, H. 2012. Politics for Macrofinancial Stability:
How to Deal with Credit Booms. IMF Staff Discussion Note, SDN/12/06.

Dimitrios, A., Helen, L., Mike, T. 2016. Determinants of non-performing loans: Evidence
from Euro-area countries. Finance Research Letters 18, 116-119.

Elyasiani, E., Mansur, I., Odusami, B. 2011. Oil price shocks and industry stock returns.
Energy Economics 33 (5), 966–974.

PT
Espinoza, R. A. Prasad, A., 2010. Nonperforming loans in the GCC banking system and their
macroeconomic effects. IMF Working Papers 10, 224- 2010.

RI
Ghosh, A., 2015. Banking-industry specific and regional economic determinants of non-

SC
performing loans: Evidence from US states. Journal of Financial Stability 20, 93-104.

Glen, J., Mondragón-Vélez, C., 2011. Business cycle effects on commercial bank loan
portfolio performance in developing economies. Review of Development Finance 1(2),
NU
150-165.

Hamilton, J., 2003. What is an oil shock? Journal of Econometrics 113 (2), 363–98.
MA

Hamilton, J.D., 2008. Oil and the macroeconomy. In: Durluf, Steven N., Blume, Lawrence E.
(Eds.), In the New Palgrave dictionary of economics, Second edition Palgrave
Macmillan, Houndmills, U.K. and New York.
D

Hamilton, J.D., Herrera, A.M., 2004. Oil shocks and aggregate macroeconomic behaviour:
E

The role of monetary policy. Journal of Money, Credit and Banking 36 (2), 265–286.
PT

Hammoudeh, S., Choi, K., 2007. Characteristics of permanent and transitory returns in oil
sensitive emerging stock markets: The case of GCC countries. Journal of International
CE

Financial Markets, Institutions and Money 17 (3), 231–245.

Henriques, I., Sadorsky, P., 2008. Oil prices and the stock prices of alternative energy
companies. Energy Economics 30, 998–1010.
AC

Henriques, I., Sadorsky, P., 2011. The effect of oil price volatility on strategic investment.
Energy Economics 33 (1), 79–87.

Hooker, M.A., 2002. Are oil shocks inflationary? Asymmetric and nonlinear specifications
versus changes in regime. Journal of Money, Credit and Banking 34, 540–561.

Huang, B.N., Hwang, M.J., Peng, H.P., 2005. The asymmetry of the impact of oil price
shocks on economic activities: An application of the multivariate threshold model.
Energy Economics 27, 455–476.

Husain, A.M., et al., 2015. Global implications of lower oil prices. IMF Staff Discussion
Note, SDN/15/15.

21
 ACCEPTED MANUSCRIPT

Igan, D., Tan, Z., 2015. Capital inflows, credit growth, and financial systems, IMF Working
Paper, WP/15/193.

IMF, 2015, Oil prices, financial stability, and the use of countercyclical macroprudential
policies in the GCC, Annual Meeting Doha Qatar.

IMF, 2016, Economic Diversification in Oil-Exporting Arab Countries, Annual Meeting of

Arab Ministries of Finance.

Jiménez, G., Saurina, J., 2004. Collateral, type of lender and relationship banking as
determinants of credit risk. Journal of Banking and Finance 28, 2191–2212.

PT
Jokipii, T., Monnin, P., 2013. The impact of banking sector stability on the real economy.
Journal of International Money and Finance. 32, 1–16.

RI
Jones, D.W., Leiby, P.N., Paik, I.K., 2004. Oil price shocks and the macroeconomy: What

SC
has been learned since 1986. The Energy Journal 25 (2), 1–32.

Khandelwal, P., Miyajima, K., Santos, A.O., 2016, The impact of oil prices on the banking
system in the GCC, IMF Working Paper, WP/16/161.
NU
Klein, N., 2013. Non-performing loans in CESEE: Determinants and macroeconomic
performance, IMF Working Paper, WP/13/72.
MA

Laeven, L., Ratnovski, L., Tong, H., 2016. Bank size, capital, and systemic risk: Some
international evidence. Journal of Banking and Finance, 69 (1), S25–S34.
D

Levintal, O., 2013. The real effects of banking shocks: Evidence from OECD countries.
Journal of International Money and Finance, 32, 556–578.
E
PT

Louzis, D.P., Vouldis, A.T., Metaxas, V.L., 2012. Macroeconomic and bank-specific
determinants of non-performing loans in Greece: A comparative study of mortgage,
business and consumer loan portfolios. Journal of Banking and Finance 36, 1012–1027.
CE

Love, I., Ariss, R. T., 2014, Macro-financial linkages in Egypt: A panel analysis of economic
shocks and loan portfolio quality, Journal of International Financial Markets, Institutions
and Money, 28 (C), pp 158–81.
AC

Mirzaei, A., and Kutan, A. M., 2016. Does bank diversification improve output growth?
Evidence from the recent global crisis. International Review of Finance. 16(3), 467-481.

Miyajima, K., 2016, An Empirical Investigation of Oil-Macro-Financial Linkages in Saudi

Arabia, IMF Working Paper, WP/16/22.

Narayan, P. K., & Sharma, S. S. 2011. New evidence on oil price and firm returns. Journal of
Banking and Finance 35 (12), 3253–3262.

Nkusu, M., 2011. Nonperforming loans and macrofinancial vulnerabilities in advanced

economies. IMF Working Paper, WP/11/161.

22
 ACCEPTED MANUSCRIPT

Poghosyan, T., Hesse, H., 2009. Oil prices and bank profitability: Evidence from major oil
exporting countries in the Middle East and North Africa. IMF Working Paper,
WP/09/220.

Prasad, A., Monem, H.A., Martinez, P.G., 2016, Macroprudential policy and financial
stability in the Arab region, IMF Working Paper, WP/16/98.

Sadorsky, P. 2008. Assessing the impact of oil prices on firms of different size: Its tough
being in the middle. Energy Policy 36:3854–61.

Sadorsky, P., 2004. Stock markets and energy prices. Elsevier, New York. Encyclopedia of

PT
Energy 5, 707–717.

Salas V., Saurina, J. 2002. Credit risk in two institutional regimes: Spanish commercial and

RI
savings banks. Journal of Financial Services Research 22 (3), 203-224.

SC
Scholtens, B., Yurtsever, C., 2012. Oil price shocks and European industries. Energy
Economics 34, 1187–1195.

Tsai, C.L., 2015. How do U.S. stock returns respond differently to oil price shocks pre-crisis,
NU
within the financial crisis, and post-crisis? Energy Economics 50, 47-62.

Zhang, D., Cai, J., Dickinson, D. G., Kutan, A. M., 2016. Non-performing loans, moral
MA

hazard and regulation of the Chinese commercial banking system. Journal of Banking
and Finance 63, 48-60.
E D
PT
CE
AC

23
 ACCEPTED MANUSCRIPT

Table 1
Definition and sources of variables

Variable Definition Source

NPL Non-performing loans to total gross loans. A non-performing loan is a Bankscope.
loan that is in default or close to being in default.

LLP Loan loss provisions to total gross loan. A loan loss provision is an "
expense set aside as an allowance for bad loans.

LLR Loan loss reserves to total gross loans. Loan loss reserves are reserves for "
future loan losses, due to defaults and non-payment.

PT
Oil price movements
Oil return I The average annual growth rate in oil price, which is calculated using the Own estimation based on data
arithmetic mean of daily 12-month growth rates of spot oil prices. See text from US. Energy Information
for more information. Administration.

RI
Oil return II The deviation of oil prices from their expected value proxied by the 12 "

SC
month forward rate. See text for more information.

Oil return up Hamilton's (2003) measure of the net oil price increase. See text for more "
information.
NU
Oil return down Hamilton's (2003) measure of the net oil price decrease. See text for more "
information.
Bank variables (Control 1)
(C) Equity ratio The ratio of equity to total assets of a bank. Bankscope.
MA

(A) Assets growth Annual growth of total assets of a bank. "

(M) Inefficiency Cost to income ratio of a bank. "
(E) NIM Net interest margin of a bank, calculated as net interest revenue as a share "
of total earning assets.
(L) Liquidity The ratio of liquid assets to total assets of a bank. "
D

Size (Log) Natural logarithm of a bank's total assets. "

Concentration Market concentration, calculated as the market share of top three largest "
E

banks in a country.
PT

Diversification Funding diversification which calculated using adjusted Bankscope and own
Herfindahl–Hirshman index (HHI). It is calculated as Diversification=1- calculation following Mirzaei
[(EQ/TF)^2+(CD/TF)^2+(IB/TF)^2+(MS/TF)^2+(LTF/TF)^2+(TLI/TF)^ and Kutan (2016).
2 ] where EQ is total equity, CD total customer deposits, IB is interbank
CE

deposits, MS is money market and short-term funding, LTF long-term

funding, TLI trading liabilities, and TF is total funding =
EQ+CD+IB+MS+LTF+TLI. Funding diversity takes values between zero
and one, with higher values indicating greater diversification.
AC

Off-balance The ratio of off-balance-sheet activities to total assets of a bank. "

Macro variables (Control 2)
GDP growth Real GDP growth (YOY) of a country. World Bank - WDI.
Inflation The (end of year) change in CPI of a country. "
Domestic credit The ratio of domestic credit to private sector to GDP. "
Trade Sum of imports and exports to GDP. "

24
 ACCEPTED MANUSCRIPT

Table 2
Summary statistics
Variable Obs. Mean Std. Dev. Min Max
NPL (%) 13788 5.650 10.450 0.000 74.420
Large banks 2,158 4.880 7.070 0.000 74.420
Small " 11,630 5.790 10.960 0.000 74.420
LLP (%) 11993 2.130 5.360 -13.980 35.870
LLR (%) 16436 7.760 10.240 0.030 69.660
Oil price movements
Oil return I 15 10.844 21.865 -43.249 49.236
Oil return II 15 10.594 21.934 -44.343 49.972

PT
Oil return up 15 2.229 3.075 0.000 11.714
Oil return down 15 -0.357 0.884 -3.485 0.000
Control 1
(C) Equity ratio (%) 17940 20.110 17.580 0.660 96.620

RI
(A) Assets growth 15491 0.210 0.480 -0.640 2.640
(M) Inefficiency (%) 17529 71.950 29.140 12.470 209.520
(E) NIM (%) 17748 6.410 4.960 -2.690 31.310

SC
(L) Liquidity 17941 0.320 0.210 0.000 0.980
Size (Log) 17966 12.640 2.420 8.650 19.290
Concentration 429 0.450 0.170 0.220 1.000
Diversification 14105 0.560 0.160 0.100 0.760
NU
Off-balance 8014 0.290 0.470 0.000 3.140
Control 2
GDP growth (%) 438 4.390 5.110 -62.080 104.490
Inflation (%) 418 9.300 10.760 -10.070 325.000
Domestic credit (%) 415 49.270 42.820 1.270 201.090
MA

Trade (%) 425 60.800 28.620 22.140 351.110

E D
PT
CE
AC

25
 ACCEPTED MANUSCRIPT

Table 3
Oil prices shocks and bank NPLs: baseline results
This table reports the results estimating 𝑁𝑃𝐿𝑖𝑐𝑡 = 𝛽0 + 𝛽1 . 𝑁𝑃𝐿𝑖𝑐𝑡−1 + 𝛽2 . 𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑡 + 𝛽3 . 𝐶𝑟𝑖𝑠𝑖𝑠𝑡 + ∑𝑙 𝛿𝑙 . 𝑋𝑙,𝑖𝑐𝑡 + ∑𝑚 𝛾𝑚 . 𝑌𝑚,𝑐𝑡 + 𝜀𝑖𝑐𝑡 . The dependent variable is bank non-performing loans to total loans (𝑁𝑃𝐿𝑖𝑐𝑡 ).
𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑡 is a vector of oil return indexes. 𝐶𝑟𝑖𝑠𝑖𝑠𝑡 is a dummy variable that takes value one for the global crisis period 2008-2010. 𝑋𝑖𝑐𝑡 is a vector of bank-specific control variables. 𝑌𝑐𝑡 is a vector of macroeconomic
variables. See Table 1 for detail definition of variables. We estimate all regressions using the two-step GMM estimator. Robust T-values are in parentheses. *, **, ***denote significance levels at the 10%, 5%, and 1%,
respectively. Sargan test: the test for over-identifying restrictions. AR(1) and AR(2): the autocorrelation tests in residuals of order 1 and 2, respectively. Sample period: 2001–2014.
Oil return I Oil return II Oil return up Oil return down

T
[1] [2] [3] [4] [5] [6] [7] [8]
Lag NPL 0.645*** 0.613*** 0.643*** 0.611*** 0.632*** 0.599*** 0.646*** 0.611***

Oil price movements

(40.59)
-0.026***
(-10.46)
(35.36)
-0.018***
(-5.40)
(40.61)
-0.026***
(-10.51)
(35.50)
-0.018***
(-5.39)
(43.01)
-0.104***
(-8.67)
I P
(36.16)
-0.063***
(-3.82)
(45.14)
0.102***
(3.27)
(38.01)
0.080**
(2.21)
Crisis 0.314** 0.122 0.291** 0.102 0.187
R 0.007 0.012 -0.113

SC
(2.37) (0.82) (2.21) (0.69) (1.28) (0.05) (0.09) (-0.76)
Control 1
(C) Equity ratio -0.101*** -0.111*** -0.103*** -0.112*** -0.094*** -0.100*** -0.075*** -0.084***
(-4.88) (-5.20) (-4.95) (-5.22) (-4.50) (-4.61) (-3.59) (-3.74)
(A) Assets growth

(M) Inefficiency
-2.490***
(-12.44)
0.010*
-2.313***
(-8.85)
0.012**
-2.505***
(-12.51)
0.010**
-2.328***
(-8.81)
0.012**
N U -2.738***
(-13.45)
0.012**
-2.357***
(-8.92)
0.014**
-2.697***
(-13.57)
0.012**
-2.346***
(-10.40)
0.011**

(E) NIM

(L) Liquidity
(1.94)
0.129***
(4.80)
1.289*
(1.88)
(2.25)
0.130***
(3.91)
2.260***
(3.24)
(1.96)
0.132***
(4.91)
1.210*
(1.76) M A (2.28)
0.133***
(3.96)
2.239***
(3.21)
(2.48)
0.180***
(7.06)
1.630**
(2.46)
(2.49)
0.167***
(4.72)
2.257***
(3.35)
(2.22)
0.179***
(6.66)
1.866***
(2.84)
(2.09)
0.171***
(5.31)
2.347***
(3.52)
Size

Concentration
0.416***
(2.65)
0.288
0.334*
(1.91)
0.302
E D 0.380**
(2.43)
0.317
0.312*
(1.79)
0.294
0.572***
(3.73)
3.589***
0.420**
(2.33)
2.434**
0.802***
(5.19)
4.627***
0.543***
(2.94)
2.990***

Diversification
(0.27)
0.013
(0.01)
P T
(0.29)
-1.079
(-0.87)
(0.30)
0.061
(0.05)
(0.28)
-1.050
(-0.85)
(3.49)
0.922
(0.78)
(2.12)
-0.203
(-0.16)
(4.17)
0.725
(0.64)
(2.59)
-0.462
(-0.38)
Off-balance

Control 2
0.544
(1.55)

C E1.141***
(2.68)
0.511
(1.45)
1.124***
(2.63)
0.425
(1.17)
1.158***
(2.65)
0.236
(0.69)
0.903**
(2.26)

C
GDP growth -0.074*** -0.077*** -0.134*** -0.159***
(-2.93) (-3.06) (-5.95) (-7.81)
Inflation

Domestic credit

Trade
A 0.034
(1.54)
0.025***
(2.78)
-0.024
0.035
(1.60)
0.025***
(2.72)
-0.023
0.029
(1.32)
0.026***
(2.86)
-0.025*
-0.001
(-0.05)
0.024***
(2.76)
-0.029**
(-1.64) (-1.62) (-1.75) (-2.24)
Sargan test (p-value) 0.19 0.18 0.20 0.18 0.14 0.24 0.09 0.27
AR(1)-(p-value) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
AR(2)-(p-value) 0.77 0.69 0.76 0.68 0.75 0.64 0.73 0.63
Observations 3609 3218 3609 3218 3609 3218 3609 3218

26
 ACCEPTED MANUSCRIPT

Table 4
Oil prices shocks and bank NPLs: Alternatives for NPLs
This table reports the results estimating 𝑁𝑃𝐿𝑖𝑐𝑡 = 𝛽0 + 𝛽1 . 𝑁𝑃𝐿𝑖𝑐𝑡−1 + 𝛽2 . 𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑡 + 𝛽3 . 𝐶𝑟𝑖𝑠𝑖𝑠𝑡 + ∑𝑙 𝛿𝑙 . 𝑋𝑙,𝑖𝑐𝑡 + ∑𝑚 𝛾𝑚 . 𝑌𝑚,𝑐𝑡 + 𝜀𝑖𝑐𝑡 . The dependent variable is an alternative for bank NPLs, either bank loan loss
provisions to total loans (𝐿𝐿𝑃𝑖𝑐𝑡 ) or bank loan loss reserves to total loans (𝐿𝐿𝑅𝑖𝑐𝑡 ). 𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑡 is a vector of oil return indexes. 𝐶𝑟𝑖𝑠𝑖𝑠𝑡 is a dummy variable that takes value one for the global crisis period 2008-2010.
𝑋𝑖𝑐𝑡 is a vector of bank-specific control variables. 𝑌𝑐𝑡 is a vector of macroeconomic variables. See Table 1 for detail definition of variables. We estimate all regressions using the two-step GMM estimator. Robust T-
values are in parentheses. *, **, ***denote significance levels at the 10%, 5%, and 1%, respectively. Sargan test: the test for over-identifying restrictions. AR(1) and AR(2): the autocorrelation tests in residuals of order
1 and 2, respectively. Sample period: 2001–2014.

Dependent variable: LLP

Return I II up down
Dependent variable: LLR
Return I II

P T up down

Lag LLP/LLR

Oil price movements

[1]
0.131***
(9.70)
-0.013***
[2]
0.130***
(9.64)
-0.013***
[3]
0.136***
(10.31)
-0.028***
[4]
0.131***
(9.77)
0.131***
[5]
0.609***
(38.91)
-0.017***
R I
[6]
0.607***
(38.87)
-0.018***
[7]
0.581***
(38.69)
-0.056***
[8]
0.588***
(38.41)
0.101***

Crisis
(-6.31)
0.396***
(4.78)
(-6.11)
0.380***
(4.61)
(-2.63)
0.277***
(3.45)
(3.90)
0.228***
(2.80)

S C (-10.73)
0.526***
(6.43)
(-10.77)
0.507***
(6.26)
(-5.38)
0.511***
(5.87)
(4.27)
0.413***
(4.83)

U
Control 1
(C) Equity ratio -0.078*** -0.078*** -0.080*** -0.076*** -0.067*** -0.069*** -0.065*** -0.060***

N
(-5.61) (-5.61) (-6.02) (-5.99) (-4.25) (-4.34) (-4.17) (-3.77)
(A) Assets growth -1.416*** -1.420*** -1.376*** -1.300*** -2.057*** -2.067*** -1.961*** -1.889***

(M) Inefficiency

(E) NIM
(-10.21)
-0.015***
(-4.26)
0.206***
(9.11)
(-10.16)
-0.015***
(-4.34)
0.206***
(9.12)
(-9.25)
-0.015***
(-4.23)
0.215***
(9.16) M
(-9.99)

(-5.24)
0.206***
(9.10)
A
-0.017***
(-13.30)
-0.005
(-1.39)
0.064***
(2.76)
(-13.35)
-0.005
(-1.39)
0.064***
(2.75)
(-12.46)
-0.001
(-0.36)
0.076***
(3.19)
(-12.43)
-0.000
(-0.13)
0.085***
(3.57)
(L) Liquidity

Size
-0.595
(-1.39)
-0.284***
-0.601
(-1.40)
-0.298***

E D
-0.492
(-1.11)
-0.285***
-0.542
(-1.18)
-0.257**
2.696***
(5.08)
0.150
2.659***
(5.02)
0.128
2.421***
(4.60)
0.099
2.343***
(4.54)
0.196*

Concentration

Diversification
(-2.70)
1.021
(1.39)
-3.352***
(-2.84)
1.071
(1.46)

P
-3.344***
T (-2.65)
2.570***
(3.34)
-3.059***
(-2.24)
3.387***
(3.80)
-3.119***
(1.30)
0.707
(0.99)
-2.518***
(1.11)
0.748
(1.05)
-2.464***
(0.86)
2.246***
(2.99)
-2.523***
(1.67)
2.790***
(3.37)
-2.561***

Off-balance
(-4.57)
0.966***
(4.04)

C E
(-4.56)
0.965***
(4.04)
(-4.26)
0.930***
(3.94)
(-4.56)
0.936***
(3.99)
(-3.34)
0.478*
(1.71)
(-3.27)
0.467*
(1.67)
(-3.27)
0.402
(1.53)
(-3.26)
0.283
(1.04)

C
Control 2
GDP growth -0.078*** -0.081*** -0.136*** -0.144*** -0.058*** -0.059*** -0.114*** -0.142***

A
(-6.01) (-6.18) (-10.05) (-10.46) (-4.42) (-4.56) (-8.38) (-10.37)
Inflation 0.038*** 0.039*** 0.026* 0.015 0.039*** 0.040*** 0.046*** 0.029**
(2.76) (2.77) (1.79) (1.09) (2.82) (2.85) (3.01) (2.37)
Domestic credit 0.002 0.002 0.003 0.003 -0.005 -0.005 0.003 -0.002
(0.32) (0.29) (0.59) (0.57) (-0.87) (-0.99) (0.63) (-0.39)
Trade -0.014* -0.014* -0.015* -0.017** -0.004 -0.004 -0.015* -0.019***
(-1.76) (-1.70) (-1.96) (-2.17) (-0.58) (-0.47) (-1.95) (-2.64)
Sargan test (p-value) 0.42 0.43 0.42 0.46 0.00 0.00 0.00 0.00
AR(1)-(p-value) 0..00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
AR(2)-(p-value) 0.58 0.58 0.61 0.56 0.38 0.38 0.36 0.35
Observations 4028 4028 4028 4028 3971 3971 3971 3971

27
 ACCEPTED MANUSCRIPT

Table 5
Oil prices shocks and bank NPLs: Large versus small banks
This table reports the results estimating 𝑁𝑃𝐿𝑖𝑐𝑡 = 𝛽0 + 𝛽1 . 𝑁𝑃𝐿𝑖𝑐𝑡−1 + 𝛽2 . 𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑡 + 𝛽3 . 𝐶𝑟𝑖𝑠𝑖𝑠𝑡 + ∑𝑙 𝛿𝑙 . 𝑋𝑙,𝑖𝑐𝑡 + ∑𝑚 𝛾𝑚 . 𝑌𝑚,𝑐𝑡 + 𝜀𝑖𝑐𝑡 . The dependent variable is bank non-performing loans to total loans (𝑁𝑃𝐿𝑖𝑐𝑡 ).
𝑂𝑖𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑡 is a vector of oil return indexes. 𝐶𝑟𝑖𝑠𝑖𝑠𝑡 is a dummy variable that takes value one for the global crisis period 2008-2010. 𝑋𝑖𝑐𝑡 is a vector of bank-specific control variables. 𝑌𝑐𝑡 is a vector of macroeconomic
variables. See Table 1 for detail definition of variables. We estimate all regressions using the two-step GMM estimator. Robust T-values are in parentheses. *, **, ***denote significance levels at the 10%, 5%, and 1%,
respectively. Sargan test: the test for over-identifying restrictions. AR(1) and AR(2): the autocorrelation tests in residuals of order 1 and 2, respectively. Sample period: 2001–2014.

Large banks Small banks

Return I
[1]
II
[2]
up
[3]
down
[4]
Return I
[5]
II

P
[6]
T up
[7]
down
[8]
Lag NPL

Oil price movements

0.704***
(60.70)
-0.011***
(-5.06)
0.704***
(60.50)
-0.011***
(-4.90)
0.708***
(55.78)
-0.008
(-0.69)
0.711***
(59.60)
0.048**
(2.06)
0.545***
(42.99)
-0.029***
(-10.95)
R I 0.543***
(43.08)
-0.030***
(-10.81)
0.524***
(42.02)
-0.123***
(-8.19)
0.536***
(48.71)
0.063
(1.25)
Crisis

Control 1
(C) Equity ratio
0.543***
(6.33)

-0.382***
0.532***
(6.15)

-0.384***
0.531***
(5.66)

-0.387***
0.454***
(5.17)

-0.400***
S C 0.064
(0.50)

-0.107***
0.042
(0.33)

-0.107***
0.167
(1.22)

-0.089***
-0.117
(-0.90)

-0.096***

(A) Assets growth

(-19.09)
-1.523***
(-8.59)
(-19.22)
-1.516***
(-8.53)
(-18.83)
-1.406***
(-8.33)
(-18.83)
-1.574***
(-9.28)

N U (-6.81)
-3.336***
(-15.58)
(-6.80)
-3.352***
(-15.55)
(-5.97)
-3.259***
(-14.70)
(-6.71)
-3.188***
(-17.71)

A
(M) Inefficiency 0.061*** 0.061*** 0.057*** 0.055*** 0.017*** 0.017*** 0.020*** 0.020***
(10.98) (10.90) (10.43) (10.11) (3.49) (3.44) (3.88) (4.07)
(E) NIM 0.533*** 0.533*** 0.498*** 0.497*** 0.087*** 0.089*** 0.097*** 0.118***

(L) Liquidity
(15.94)
1.715***
(15.93)
1.688***
(13.49)
1.510***
M(14.53)
1.123**
(3.28)
2.967***
(3.31)
2.894***
(3.40)
2.928***
(4.39)
3.649***

D
(3.36) (3.31) (2.79) (2.05) (3.84) (3.74) (4.04) (5.53)
Size -0.474*** -0.480*** -0.318** -0.249* -0.295 -0.320 -0.163 -0.078

Concentration

Diversification
(-3.79)
3.078***
(4.17)
-5.628***
(-3.82)
3.112***
(4.19)

T
-5.610***
E
(-2.35)
4.044***
(5.26)
-6.094***
(-1.86)
4.419***
(5.66)
-6.145***
(-1.43)
0.004
(0.00)
-1.827*
(-1.55)
-0.032
(-0.03)
-1.804*
(-0.75)
3.019***
(2.62)
-0.473
(-0.38)
3.671***
(3.42)
-1.533

Off-balance
(-9.97)
-0.062
(-0.32)
E
-0.058
P
(-9.95)

(-0.30)
(-10.66)
0.149
(0.73)
(-10.87)
0.156
(0.79)
(-1.75)
2.157***
(6.83)
(-1.73)
2.163***
(6.79)
(-0.45)
2.528***
(8.20)
(-1.55)
2.355***
(8.90)

C
Control 2
GDP growth -0.185*** -0.189*** -0.241*** -0.235*** -0.082*** -0.086*** -0.171*** -0.219***

C
(-10.57) (-10.95) (-17.60) (-18.19) (-3.45) (-3.64) (-8.60) (-11.90)
Inflation -0.025** -0.025** -0.035*** -0.038*** 0.042* 0.043* 0.044 0.005

Domestic credit

Trade
A
(-2.01)
0.044***
(7.43)
0.017**
(2.51)
(-2.07)
0.043***
(7.39)
0.017**
(2.56)
(-2.77)
0.041***
(6.37)
0.011
(1.56)
(-3.41)
0.039***
(6.07)
0.011
(1.57)
(1.73)
-0.004
(-0.34)
-0.035**
(-2.32)
(1.76)
-0.006
(-0.52)
-0.033**
(-2.18)
(1.57)
-0.006
(-0.54)
-0.049***
(-3.38)
(0.22)
-0.006
(-0.52)
-0.058***
(-4.06)
Sargan test (p-value) 0.13 0.12 0.15 0.14 0.10 0.10 0.09 0.09
AR(1)-(p-value) 0.01 0.01 0.01 0.01 0.00 0.00 0.00 0.00
AR(2)-(p-value) 0.84 0.85 0.88 0.85 0.90 0.89 0.82 0.78
Observations 1393 1393 1393 1393 1825 1825 1825 1825

28
 ACCEPTED MANUSCRIPT

Table 6
Oil prices shocks and bank NPLs: Robustness tests
Return I II Return I II Return I II
[1] [2] [3] [4] [5] [6]
Panel A: Excluding Islamic Panel B: Excluding oil-rich Panel C: Including a new set
banks advanced economies of macro variables
Lag NPL 0.617*** 0.615*** 0.590*** 0.587*** 0.492*** 0.492***
(35.50) (35.62) (36.08) (36.27) (64.98) (64.70)
Oil price movements -0.020*** -0.020*** -0.026*** -0.027*** -0.025*** -0.025***
(-5.98) (-5.92) (-7.67) (-7.69) (-8.92) (-9.19)
Crisis 0.127 0.106 0.121 0.086 1.025*** 0.998***
(0.85) (0.71) (0.74) (0.53) (10.48) (10.42)
Control 1 Y Y Y Y Y Y
Control 2 Y Y Y Y Y Y
Unemployment 0.421*** 0.410***

PT
(7.02) (6.86)
Exchange rate -0.029*** -0.030***
(-2.93) (-3.03)
Real interest rate 0.120*** 0.120***
(11.84) (11.94)

RI
Sargan test (p-value) 0.17 0.17 0.15 0.15 0.03 0.03
AR(1)-(p-value) 0.00 0.00 0.00 0.00 0.01 0.01

SC
AR(2)-(p-value) 0.68 0.68 0.58 0.58 0.96 0.97
Observations 3100 3100 2794 2794 1480 1480
Panel E: Including more lag Panel F: Using differences for
Panel D: Non-linear model
of dependent variable two non-stationary variables
NU
Lag NPL 0.617*** 0.617*** 0.606*** 0.603*** 0.611*** 0.609***
(35.69) (35.66) (41.09) (41.20) (34.36) (34.48)
Lag2NPL -0.092*** -0.093***
(-12.24) (-12.23)
Oil price movements -0.014*** -0.014*** -0.015*** -0.015*** -0.019*** -0.019***
MA

(-4.10) (-4.11) (-4.82) (-4.72) (-5.85) (-5.84)

Oil price movements ^ 2 0.000*** 0.000***
(2.71) (2.67)
Crisis -0.183 -0.124 0.335*** 0.316** 0.164 0.140
(-0.93) (-0.68) (2.64) (2.50) (1.12) (0.96)
Control 1 Y Y Y Y Y Y
Control 2 Y Y Y Y Y Y
D

Sargan test (p-value) 0.17 0.18 0.15 0.14 0.25 0.26

AR(1)-(p-value) 0.00 0.00 0.00 0.00 0.00 0.00
E

AR(2)-(p-value) 0.72 0.71 0.98 0.99 0.65 0.65

Observations 3218 3218 2647 2647 3218 3218
PT

Panel G: Excluding
Panel H: Excluding market-
financially developed
based economies
economies
Lag NPL 0.550*** 0.551*** 0.601*** 0.600***
CE

(59.14) (58.88) (76.18) (76.69)

Oil price movements -0.041*** -0.043*** -0.038*** -0.040***
(-13.29) (-13.64) (-11.13) (-11.54)
Crisis 1.476*** 1.462*** 0.462*** 0.448**
AC

(11.87) (11.82) (2.65) (2.57)

Control 1 Y Y Y Y
Control 2 Y Y Y Y
Sargan test (p-value) 0.06 0.07 0.00 0.00
AR(1)-(p-value) 0.00 0.00 0.02 0.02
AR(2)-(p-value) 0.09 0.09 0.74 0.74
Observations 1519 1519 1818 1818

29
 ACCEPTED MANUSCRIPT

Table A1
Top 30 oil-exporting countries, and number of banks and value of NPLs by country
Volume of oil Number
Code Country Rank Date of info. NPLs (%)
exports (bbl/d) of banks
1 Algeria 1,097,000 15 2010 EST. 20 3.871
2 Angola 1,928,000 6 2010 EST. 16 5.843
3 Australia 261,300 28 2012 EST. 38 1.331
4 Azerbaijan 821,000 17 2011 EST. 31 13.522
5 Brazil 619,100 21 2010 EST. 175 9.691
6 Canada 1,756,000 7 2012 EST. 66 3.115
7 Colombia 777,900 18 2009 37 4.329
8 Congo 290,000 26 2011 EST. 3 1.013
9 Ecuador 413,000 22 2013 EST. 36 24.016
10 Egypt 189,000 30 2010 EST. 35 13.802
11 Equatorial Guinea 319,100 24 2010 EST. 2 17.766

PT
12 Gabon 225,300 29 2010 EST. 7 2.765
13 Indonesia 338,100 23 2010 EST. 95 5.999
14 Iraq 2,390,000 4 2013 EST. 20 26.935
15 Iran 1,322,000 13 2011 EST. 16 9.028

RI
16 Kazakhstan 1,406,000 9 2010 EST. 35 14.068
17 Kuwait 1,395,000 10 2010 EST. 16 8.497
18 Libya 735,000 19 2014 EST, 11 26.943

SC
19 Malaysia 269,000 27 2012 EST. 60 4.675
20 Mexico 1,333,000 12 2012 EST. 59 4.520
21 Nigeria 2,341,000 5 2010 EST. 75 17.098
22 Norway 1,303,000 14 2012 EST. 27 2.505
NU
23 Oman 833,400 16 2010 EST. 10 6.950
24 Qatar 1,389,000 11 2012 EST. 12 4.680
25 Russia 4,625,000 2 2013 EST. 1123 3.650
26 Saudi Arabia 6,880,000 1 2011 EST. 13 3.205
MA

27 South Sudan 291,800 25 2010 EST. 4 10.580

28 UAE 2,500,000 3 2010 EST. 31 6.354
29 UK 637,800 20 2013 EST. 181 5.850
30 Venezuela 1,645,000 8 2010 EST. 56 5.264

Total 2310 8.929

E D
PT
CE
AC

30
 ACCEPTED MANUSCRIPT

Dependence on oil revenue by country

(Oil exports % of GDP, average 2001-2013)
70

60

50
75th percentile = 44.21

40

30
50th percentile = 25.35

20

PT
10 25th percentile = 6.92

0
R an
B a
us K

ou or t

ez ia

Li a
A E
do da

G an

A ait
M sia

al ia

K ia

ne
S y

cu a

hs r

S r n
ol co

ia
a il

E a

or

N ela

at C aq
A n

a
O n

lG o
S N p

ak ta
C az

th wa
li

ol
si

E si

ze o
ta

ia ng
Ira

by
di ija
A
A U

en r

b
M b

er
gy

ad
tra

uw
C exi

ud
In na

V lge

ui
A ab

Ir
a z Qa
ne

ay

us

ng
U

ra
om

u
r

a u ba

or o
ig

RI
K

qu
E
Fig. 1. Dependence on oil revenue by country. Source: IMF and authors calculations.

SC
Dependence on oil revenue in 30 oil-exporting countries
over 2001-2013
20 50
Oil revenue (% of total exports) - RHS
NU
Oil revenue (% of GDP) - LHS

18 45
MA

16 40

14 35

12 30
E D

10 25
01 02 03 04 05 06 07 08 09 10 11 12 13
PT

Fig. 2. Dependence on oil revenue over 2001-2013. Source: IMF and authors calculations.
CE

Oil prices over 2000-2014

160

140
AC

120
Oil price ($/barrel)

100

80

60

40

20

0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Fig. 3. Movements in daily oil prices between 2000 and 2014. Source: US Energy Information Administration
and authors calculations.

31
 ACCEPTED MANUSCRIPT

Bank non-performing loans in 30 oil-exporting countries

over 2000-2014
16
All banks
Large banks
Small banks
14

12

10

PT
4

RI
2
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

SC
Fig. 4. Bank non-performing loans as % of total loans in oil-exporting countries between 2000 and 2014.
Source: Bankscope and authors calculations.
NU
Oil price return over 2000-2014
MA

60

40
D

20
E

0
PT

-20
CE

-40

Spot (%) Future (%) Oil up Oil down

-60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
AC

Fig. 5. Yearly oil price return between 2000 and 2014. Source: US Energy Information Administration and
authors calculations.

32