Government failures and non-performing loans in European countries: a spatial approach

Abstract

PurposeThe purpose is to analyze the spatially varying impacts of corruption and public debt as % of GDP (proxies of government failures) on non-performing loans (NPLs) in European countries; comparing two periods: one prior to the crisis of 2007 and another one after that. The authors first modeled the NPLs with an ordinary lest square (OLS) regression and found clear evidence of spatial instability in the distribution of the residuals. As a second step, the authors utilized the geographically weighted regression (GWR) to explore regional variations in the relationship between NPLs and the proxies of “Government failures”.Design/methodology/approachThe authors first modeled the NPL with an OLS regression and found clear evidence of spatial instability in the distribution of the residuals. As a second step, the author utilized the Geographically Weighted Regression (GWR) (Fotheringham et al., 2002) to explore regional variations in the relationship between NPLs and proxies of “Government failures” (corruption and public debt as % of GDP).FindingsThe results confirm that corruption and public debt as % of GDP, after the crisis of 2007, have affected significantly on NPLs of the EU countries and the following countries neighboring the EU: Switzerland, Iceland, Norway, Montenegro, and Turkey.Originality/valueIn a spatial prospective, unprecedented in the literature, this research focused on the impact of corruption and public debt as % of GDP on NPLs in European countries. The positive correlation, as expected, between public debt and NPLs highlights that fiscal problems in Eurozone countries have led to an important rise of problem loans. The impact of institutional corruption on NPLs reports that the higher the corruption, the higher is the level of NPLs.

Government failures and non-performing loans in Asian countries

“…Ofria and Mucciardi (2022) confirm that both corruption and public debt to GDP had a significant positive effect on NPLs for EU countries for the years 2005–2015 [3]. A high public debt is assimilated to a government failure because deteriorating public finances place a “ceiling” on the market evaluation of credibility for the national banks, and, consequently, banks become hard-pressed for liquidity (Fallanca et al., 2020): banks have to cut lending and thus debtors cannot refinance their debts (Ghosh, 2015).…”

“…Government failures (Coase, 1964;McKean, 1965), according to the school of Public Choice (Buchanan, 2003), represent the inefficiencies and iniquities that may be associated with public action (Wolf, 1979;Keech and Munger, 2015). Ofria and Mucciardi (2022), studying the surge in NPLs that marked the global financial crisis of 2007-2009, confirm that the proxies of government failures (corruption and public debt as % of GDP), significantly affected the NPLs of EU countries and of these neighboring states: Switzerland, Iceland, Norway, Montenegro and Turkey. Regarding Asia, only scanty and partial evidence has been published.…”

How the Rules of no.11/POJK.03/2020 Banking Restructuring Policy Improve Financial Performance? (Empirical Study of Islamic Banks in Indonesia)

“…Non-performing financing negatively impacts banks, such as non-payment of loans/financing (NPL/NPF) provided either wholly or partially. Between public debt and NPLs, fiscal problems led to a notable increase in non-performing loans (Ofria & Mucciardi, 2022).…”