Abstract
This research aims to investigate how bank risk is affected by macroeconomic shocks and how bank heterogeneity influences the responses of bank risk variables to macroeconomic shocks in Taiwan. By combining macro variables and micro bank risk variables into vector autoregressions (VAR) model, we are able to analyze the behavior of bank risk at the micro-level. Our main findings are as follows: (a) the contractionary monetary policy shock increases the backward-looking risk of the bank, however, it also decreases the forward-looking risk of the bank; (b) the positive real output shock reduces the backward-looking risk, but its impact on forward-looking risk is uncertain; (c) the positive real house price shock raises the backward-looking risk; and (d) the responses of bank risks to macroeconomic shocks are significantly influenced by characteristics of banks such as their long-run average non-performing loans (NPL) ratio and whether the banks originated from credit cooperatives.