Determinant of non performing loan

PANOECONOMICUS, 2014, 2, pp. 193-206
Received: 27 January 2012; Accepted: 04 April 2013.

Vasiliki Makri
Department of Business Administration,
University of Patras,
Greece


Department of Business Administration,
University of Patras,
Greece
[e-mail]

Athanasios Bellas
Department of Business Administration,
University of Patras,
Greece


Determinants of Non-Performing
Loans: The Case of Eurozone

[e-mail]

Athanasios
Tsagkanos



UDC 336.77 (4-672EU) ”2000/2008”
DOI: 10.2298/PAN1402193M
Original scientific paper

[e-mail]

Acknowledgements: The authors would like to thank the two anonymous referees and the Editor for their constructive comments and suggestions that improved our paper.
We are also grateful to Dr.
Konstantinos Papadatos for his helpful recommendations. Summary: 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.
Key words: Non-performing loans, Bank specific variables, Macroeconomic variables, GMM difference.
JEL: C23, G21.

During the last two decades, a significant

References: Arellano, Manuel, and Stephen Bond. 1991. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Barseghyan, Levon. 2010. “Non-Performing Loans, Prospective Bailouts, and Japan’s Slowdown.” Journal of Monetary Economics, 57(7): 873-890. Bercoff, Jose, Julian Giovanni, and Franque Grimard. 2002. “Argentinean Banks, Credit Growth and the Tequila Crisis: A Duration Analysis.” Unpublished. Berger, Allen, and Robert DeYoung. 1997. “Problem Loans and Cost Efficiency in Commercial Banks.” Journal of Banking and Finance, 21(6): 849-870. Bolt, Wilko, and Alexander F. Tieman. 2004. “Banking Competition, Risk and Regulation.” International Monetary Fund Working Paper WP/04/11. Boudriga, Abdelkader, Neila Taktak, and Sana Jellouli. 2009a. “Bank Specific, Business and Institutional Environment Determinants of Nonperforming Loans: Evidence from Boudriga, Abdelkader, Neila Taktak, and Sana Jellouli. 2009b. “Banking Supervision and Nonperforming Loans: A Cross-Country Analysis.” Journal of Financial Economic Brookes, Martin, Mike Dicks, and Mahmood Pradhan. 1994. “An Empirical Model of Mortgage Arrears and Repossessions.” Economic Modelling, 11(2): 134-144. Cingolani, Massimo. 2013. “Finance Capitalism: A Look at the European Financial Accounts.” Panoeconomicus, 60(3): 249-290. Cotugno, Matteo, Valeria Stefanelli, and Guiseppe Torluccio. 2010. “Bank Intermediation Models and Portfolio Default Rates: What’s the Relation?” Paper presented at 23rd Dash, Manoj K., and Gaurav Kabra. 2010. “The Determinants of Non-Performing Assets in Indian Commercial Bank: An Econometric Study.” Middle Eastern Finance and De Bock, Reinout, and Alexander Demyanets. 2012. “Bank Asset Quality in Emerging Markets: Determinants and Spillovers.” International Monetary Fund Working Paper Espinoza, Raphael A., and Ananthakrishnan Prasad. 2010. “Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects.” International Monetary European Commission. 1997. Credit Institutions and Banking, the Single Market Review Series, Subseries II - Impact on Services Fernandez de Lis, Santiago, Jorge Martinez Pagés, and Jesus Saurina. 2000. “Credit Growth, Problem Loans and Credit Risk Provisioning in Spain.” Banco de Espana Fiordelisi, Franco, David Marques-Ibanez, and Phil Molyneux. 2010. “Efficiency and Risk in European Banking.” European Central Bank Working Paper Series 1211. Fofack, Hipollyte. 2005. “Non-Performing Loans in Sub-Saharan Africa: Causal Analysis and Macroeconomic Implications.” World Bank Policy Research Working Paper 3769. PANOECONOMICUS, 2014, 2, pp. 193-206 205 Gonzales-Hermosillo, Brenda. 1999. “Developing Indicators to Provide Early Warnings of Banking Crises.” Finance & Development Jeong, Sangjun, and Hueechae Jung. 2013. “Bank Wholesale Funding and Credit Procyclicality: Evidence from Korea.” Panoeconomicus, 60(5): 615-631. Jimenez, Gabriel, and Jesus Saurina. 2006. “Credit Cycles, Credit Risk, and Prudential Regulation.” International Journal of Central Banking, 2(2): 65-98. Keeton, William R., and Charles S. Morris. 1987. “Why Do Banks’ Loan Losses Differ?” Federal Reserve Bank of Kansas City Economic Review, 72(5): 3-21. Keeton, William R. 1999. “Does Faster Loan Growth Lead to Higher Loan Losses?” Federal Reserve Bank of Kansas City Economic Review, 84(2): 57-75. Khemraj, Tarron, and Sukrishnalall Pasha. 2009. “The Determinants of Non-Performing Loans: An Econometric Case Study of Guyana.” Munich Personal RePEc Archive Louzis, Dimitrios, Aggelos T. Vouldis, and Vasilios L. Metaxas. 2010. “Macroeconomic and Bank-Specific Determinants of Non-Performing Loans in Greece: A Comparative Manove, Michael, Jorge A. Padilla, and Marco Pagano. 2001. “Collateral versus Project Screening: A Model of Lazy Banks.” RAND Journal of Economics, 32(4): 726-744. McGoven, John. 1993. “Why Bad Loans Happen to Good Banks?” The Journal of Commercial Lending, 75(6): 44-51. Misra, Shri B. M., and Sarat Dhal. 2010. “Pro-Cyclical Management of Banks’ NonPerforming Loans by the Indian Public Sector Banks.” http://www.bis.org/ repofficepubl/arpresearch201003.08.pdf. Nkusu, Mwanza. 2011. “Nonperforming Loans and Macrofinancial Vulnerabilities in Advanced Economies.” International Monetry Fund Working Paper 11/161. Panopoulou, Marie. 2005. Technological Change and Corporate Strategy in the Greek Banking Industry Rime, Bertrand. 2001. “Capital Requirements and Bank Behaviour: Empirical Evidence for Switzerland.” Journal of Banking and Finance, 25(5): 789-805. Rinaldi, Laura, and Alicia Sanchis-Arellano. 2006. “Household Debt Sustainability, what Explains Household Non-Performing Loans? An Empirical Analysis.” European Salas, Vincente, and Jesus Saurina. 2002. “Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks.” Journal of Financial Services Research, Salas, Vincente, and Jesus Saurina. 2003. “Deregulation, Market Power and Risk Behaviour in Spanish Banks.” European Economic Review, 47(6): 1061-1075. Sinkey, Joseph F., and Mary B. Greenawlat. 1991. “Loan-Loss Experience and RiskTaking Behaviour at Large Commercial Banks.” Journal of Financial Services Research, 5(1): 43-59. Zeng, Shihong. 2011. “Bank Non-Performing Loans (NPLS): A Dynamic Model and Analysis in China.” Modern Economy, 3(1): 100-110. PANOECONOMICUS, 2014, 2, pp. 193-206