In this paper, we analyze the link between the macroeconomic developments and the banking credit risk in a particular group of countries – Greece, Ireland, Portugal, Spain and Italy (GIPSI) – recently affected by unfavourable economic and financial conditions.

Using a methodology that is robust to endogeneity and omitted variable problems, it is found that the stock returns of all banks that are listed in Borsa Istanbul (BIST) respond significantly to the monetary policy surprises on Monetary Policy Committee (MPC) meeting days prior to May 2010. It...