Determinants of non-performing loans: Evidence from Euro-area countries (original) (raw)
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Determinants of non-performing loans: The case of Eurozone
Panoeconomicus, 2014
The purpose of the present study is to identify the factors affecting the non-performing loans rate (NPL) of Eurozone?s banking systems for the period 2000-2008, just before the beginning of the recession. In our days, Eurozone is in the middle of an unprecedented financial crisis, calling into question the soundness of the banking systems of European countries. Looking at both macro-variables (e.g. annual percentage growth rate of gross domestic product, public debt as % of gross domestic product, unemployment) and micro-variables (e.g. loans to deposits ratio, return on assets, return on equity), we investigate which factors determine NPL on aggregate level. Overall, our findings reveal strong correlations between NPL and various macroeconomic (public debt, unemployment, annual percentage growth rate of gross domestic product) and bank-specific (capital adequacy ratio, rate of nonperforming loans of the previous year and return on equity) factors.
Factors Affecting Non-Performing Loans in Europe Before and After Global Financial Crisis
International Journal of Managerial Studies and Research
Non-performing loans is a major importance issue that banks need to keenly consider for banking system's viability and economies sustainability, as banking sector's stability is the foundation of macroeconomic policy. There are several macroeconomic and banking factors affecting non-performing loans and this paper aims to investigate the deterministic factors from both perspectives. For the purposes of our paper, we applied dymanic panel data analysis, using both macroeconomic and banking factors, in order to examine their impact on non-performing loans for the period 2005-2019 for 10 European countries
Bank Non-Performing Loans – a Panel Data-Based Analysis in European Context. Study Case: Germany
New Trends in Sustainable Business and Consumption, 2023
Humanity has recently been crossed by periods of great crises, and banks have had a particularly important role in keeping the economy afloat and in relaunching economic activities in these difficult periods. If we refer to the stability, health and efficiency of the banking system, one of the important factors mentioned in the specialized literature is the size of Non-Performing Loans. The present work carries out a time and space analysis of this indicator for the EU member countries, observing its behavior during major crises. Thus, in the distribution of European countries there was a decrease in the median level of the indicator and in its variability, but also an increase in the predominance of countries with low non-performing loans ratio. At the same time, the case of Germany is studied, with the strong and weak points of its banking system and the key determinants of the rate of non-performing loans, for the main commercial banks in Germany are identified, using a panel data regression model. The results revealed that the indicator-level is negatively and significantly correlated with the loan-deposit ratio and the degree of financial profitability and positively and significantly correlated with the total value of assets and the degree of capital adequacy. From this emerges the need to promote policies to stimulate the prudent behavior of banks in granting loans, in order to ensure the stability and health of the banking system in European countries.
Non-performing loans in the euro area: are core-periphery banking markets fragmented?
The objective of this study is to examine the causes of non-performing loans (NPLs) in the banking system of the euro area for the period 2003-2013 and distinguish between core and periphery country determinants. The increase in NPLs post crisis has put into question the robustness of many European banks and the stability of the whole sector. It still remains a serious challenge, especially in peripheral countries which are hardest hit by the financial crisis. By employing both Fully Modified OLS and Panel Cointegrated VAR we estimate that NPLs are affected by the same macroeconomic and bank-specific conditions but the responses are stronger in the periphery. Following the FMOLS estimations NPLs in the euro area have performed an upward (much higher in the periphery) shift after 2008 and are mostly related to worsening macroeconomic conditions especially with respect to unemployment, growth and taxes. Fiscal consolidation and interest rate margins are significant for the periphery while credit to GDP is significant only for the core. Quality of management and loans to deposits play an important role, while size is negatively significant only in the periphery. Most of these findings were confirmed by the panel Cointegrated VAR results. A chi-square test comparing the estimated coefficients for the core and periphery NPLs rejects the hypothesis of equality revealing another aspect of banking fragmentation in the euro area. Such findings can be helpful when designing macro-prudential as well as NPL resolution policies, which should be adjusted appropriately to the different responses between core and periphery banks.
Macroeconomic and macro-financial factors as leading indicators of non-performing loans
Journal of Economic Studies, 2020
Purpose-Large or increasing stocks of non-performing loans in the banking sector constitute threats to financial stability. This paper considers to which extent various macroeconomic and macro-financial factors may serve as leading indicators for the dynamics of the ratio of non-performing loans to total loans. Design/methodology/approach-The paper estimates panel data models for all EU countries and two groups of EU countries using quarterly data over approximately 20 years. Findings-The estimations show that many macroeconomic and macro-financial variables are leading indicators for non-performing loans in the EU countries, even years ahead. Higher GDP growth, lower inflation and lower debt are robust leading indicators of a lower ratio of non-performing loans in the future. The current account balance and real house prices are important indicators for the Western European group but not for the Central and Eastern European group. Research limitations/implications-The estimations are carried out for panels of EU countries and the effects may hence be seen as averages for the countries in the particular panel and may not apply for individual countries. Practical implications-National and international authorities have brought in systems to detect and address imbalances and emerging problems in the financial sectors. Many of the measures operate with long lags, and so it is important to assess whether various macroeconomic and macro-financial variables may serve as leading indicators for future developments of non-performing loans. Originality/value-The main contribution of the paper is that it estimates models meant expressly for predicting non-performing loans several years ahead. The results are thus of practical use for national and international authorities which typically have access to measures that operate with a long delay. The analysis also includes more macroeconomic and macro-financial variables as leading indicators than have typically been used in earlier studies. Keywords Macroeconomic factors, Leading indicators, Financial stability, Non-performing loans Paper type Research paper JEL Classification-E44, E47, G21 We would like to thank an anonymous referee for insightful comments to an earlier version of the paper. Mykola Herasymovych and Kateryna Volkovska provided valuable research assistance. The views expressed are those of the authors and do not necessarily represent the views of Bank of Estonia or other parts of the Eurosystem.
Determinants of Non-Performing Loans for the EEC Region. A Financial Stability Perspective
Management & Marketing. Challenges for the Knowledge Society
This article investigates the determinants of non-performing loans for a panel of EEC countries and the implications for the real economy, covering the period 2005-2017. Among the determinants, the paper proposes macroeconomic factors, banking sector variables, and cost and governance indicators. Additionally, the paper explores the extensive use of macroprudential measures in these countries. Using a panel with fixed effects and a dynamic GMM estimator, the results support the existing findings that adverse macroeconomic developments are generally associated with higher non-performing loans, while increases in NPLs have a rather transitory effect on the real economy and credit. NPL ratios increase if macroeconomic conditions deteriorate, while an improvement in the government effectiveness reduces them. A more profitable and better capitalized banking sector generally leads to lower NPLs. Moreover, countries with higher past credit growth rates witnessed higher NPLs in the periods ...
Recent developments, the 2008-banking crisis, showed that when a country’s banking sector faces a significant increase in the amount of non-performing loans, financial stability is threatened. This study investigates the impact of banking competition and Eurozone membership on non-performing loans. By using an up to date panel dataset for the period 1998-2011 and focusing exclusively on the 28 European Union countries, this study facilitates the design of macro-prudential policies in the context of the upcoming EU banking union. It adopts a macro-oriented cross-country approach rather than bank-level or country specific approach and combines macroeconomic, banking-sector specific, institutional and regulatory variables from a large number of studies. A new World Bank series, the 2013 Global Financial Development Database is used as the major source for the main measure of banking competition, the Lerner index and also for alternative measures of competition and banking sector-specific determinants. In order to assess the effect of Eurozone on financial stability, contrary to other studies, this study adopts a difference-in-differences approach. By using OLS fixed effects and Arellano-Bond GMM estimation methods, we find that a lower level of banking competition as measured by the Lerner Index, is associated with a lower level of non-performing loans in EU countries. The use of the Boone Indicator instead of the Lerner Index appears to confirm these findings, whereas five-bank asset concentration is insignificant. Apart from banking competition, macroeconomic and institutional determinants are found to be associated with non-performing loans in EU. More specifically, higher levels of corruption and unemployment are found to be associated with higher levels of NPLs in EU countries. On the other hand, higher levels of economic growth, greater depth of credit information available to financial institutions and a higher percentage of registered individuals in private credit bureaus are associated with a lower level of NPLs in EU countries. The results of the difference-in-differences approach show that Eurozone countries appear to have lower levels of non-performing loans than non-Eurozone EU countries.
Micro and Macro Determinants of Non-performing Loans
International Journal of Economics and Financial Issues, 2013
In this study we tried to detect the determinants of non-performing loans for a sample of 85 banks in three countries (Italy, Greece and Spain) for the period of 2004-2008. These countries have faced financial problems after the subprime crisis on 2008. The variables used are macroeconomic variables and specific variables to the bank. The macroeconomic variables are included the rate of growth of GDP, unemployment rate and real interest rate with respect to specific variables opted for the return on assets, the change in loans and the loan loss reserves to total loans ratio (LLR/TL). After the application of the method of panel data, we found the problem loans vary negatively with the growth rate of GDP, the profitability of banks' assets and positively with the unemployment rate, the loan loss reserves to total loans and the real interest rate.
Determinants of Non-Performing Loans: Evidence from Turkish Banking Sector
2008
The issue of banks' loan quality has assumed growing importance at the international level. This study aims to tackle the issue and to verify the impact of bank-specific determinants and macroeconomic indicators on banks' loan quality. The analysis is conducted on a sample of 2,816 European banks over the period 2011-2015 through a multivariate regression with panel data. The main evidence shows that a higher return on average assets and a greater soundness of the bank can be associated with a better loan quality. Furthermore, the results also demonstrate that system conditions can contribute to determining banks' asset quality. Adverse cyclical conditions, resulting from a lower GDP growth and a higher unemployment rate, can generate a lower loan quality.