Determinants of the Level of Non-Performing Loans in Commercial Banks of Transition Countries

Abstract

Problem loans have generated considerable academic and policy attention in recent years, fueled in part by the aftermath of the 2008-2009 economic crisis and subsequent credit crunch. Problem loans, referred to as non-performing loans (NPL), are loans which are not paid in the structured time period as set in the contract between the borrower and the bank. The goal of this study is to show the influence, in transition countries, of macroeconomic factors on the level of these loans. Specifically, factors such as Gross Domestic Product (GDP growth), inflation, unemployment and export growth shall be considered, using a variety of econometric models and specifications to ensure robustness, including Fixed and Random Effects Models and Arellano-Bond Dynamic Panel estimation. We use data from the World Bank and International Monetary Fund for a sample of transition countries over the period 2006 and 2016. Findings show that GDP growth and inflation are both negatively and significantly correlated with the level of NPLs, while unemployment is positively-related to NPLs. These results have important implications for banking stability within transition countries, and the role of macroeconomic policies in this regard.

Key Macroeconomic Drivers on Reducing Non Performing Loans in Albania

“…Meanwhile the unemployment and inflation variables have not resulted statistically significant for Albania, even though these variables have proved to be statistically significant in explaining NPL-s for Mazreku, I., Morina, F., at al (2018) in a study for 10 transition countries, part of CEE. We think that maybe the averages of data as they have elaborated the data for the 10 countries in group, can cause such conclusions.…”

“…Bogdan, F. (2017) found that the determinants of bad loans in the banks from Central and Eastern Europe are Real GDP growth rate (%) and inflation rate-CPI with a negative effect, Unemployment rate with a positive effect. Mazreku, I., Morina, F., et al, (2018) in a study for 10 transition countries, part of CEE, found that GDP growth had the strongest inverse relationship with NPL, meanwhile significant relationships had inflation and unemployment, with a negative and positive relationship respectively. We have to emphasize that Albania has been part of this study as well.…”

The Impact of Regulatory Pressures on Governance on the Performance of Public Banks’ with a European Mediterranean Region Connection

“…This put banks into a serious liquidity problem, which led to the Liquidity and Credit Crisis. In period two LTD ratio was less than 100% meaning that banks were lending from their deposit accounts, without borrowing additional funds (Grima et al, 2019;Camilleri et al, 2019;Mazreku et al, 2018, in their study, found that this led to a 'deposit-war' between banks to attract customer deposits. Besides, this had a negative impact on their profitability.…”

Do Economic Adjustment Programmes Set Conflicting Objectives? The Case of Greece

“…Decreasing NPLs was a major objective for bank resolution. NPLs are positively correlated to unemployment, whereas they are negatively correlated to GDP growth rate and inflation [49]. Furthermore, NPLs are positively correlated to macroeconomic and financial disequilibriums, as well as to the government's fund-raising capacity [50].…”