Macroeconomic Determinants of Bad Loans: Evidence from Italian Banks

Abstract

In this paper we use a single-equation time series approach to examine the macroeconomic determinants of banks' loan quality in Italy in the past twenty years, as measured by the ratio of new bad loans to the outstanding amount of loans in the previous period. We analyse the quality of loans to households and firms separately on the grounds that macroeconomic variables may affect these two classes of borrowers differently. According to our estimated models: i) the quality of lending to households and firms can be explained by a small number of macroeconomic variables mainly relating to the general state of the economy, the cost of borrowing and the burden of debt; ii) changes in macroeconomic conditions generally affect loan quality with a lag; and iii) the out-of-sample prediction accuracy of the models is quite satisfactory and proved to be robust to the recent financial crisis.

The Impact of Macroeconomic Factors on Credit Risk in Conventional Banks and Islamic Banks: Evidence from Indonesia

“…Singjergji (2013) investigates the main macroeconomic variables in the Albanian banking find that there is a positive and significant relationship between interest rate and credit risk. This confirms previous studies Farhan (2012); Ahmad & Bashir (2013);and Bofondi (2011) indicate that interest rate affects the amount of bad debt in the case of floating interest rate. Therefore, the increase in the debt caused by the increase in payment of interest rates and result in the rise of non-performing loan.…”

Macroeconomic Determinants of Non-Performing Loans: An Empirical Study of Some Arab Countries

“…This may result in a decrease in revenues of firms and therefore a decrease in their ability to meet their debt obligations. Accordingly, in periods of high economic growth and low unemployment rates borrowers are more able to support debt, consequently resulting in the decline of NPLs (Bofondi and Ropele, 2011).…”

“…Moreover, Das and Ghosh (2007) confirmed that GDP growth has contemporaneous impact on loan default in Indian stateowned banks. In Italy, Bofondi and Ropele (2011) clarified that the annual growth rates of GDP has a negative impact on the quality of household loans, whereas unemployment has a negative effect. Utilizing a data set of 26 advanced countries, Nkusu (2011) clarified that deterioration in the macroeconomic environment as proxied by slower growth, higher unemployment is associated with rising NPLs.…”

“…In turn, stable business environment reduces the risk of the financial deterioration and enables the households to plan their income more safely and manage their personal loans efficiently. Therefore, the relationship between inflation and NPLs can be positive or negative (Bofondi and Ropele, 2011;Negera, 2012).…”

Can Italy Grow Out of Its NPL Overhang? A Panel Threshold Analysis

“…Quagliariello (2007) concludes that Italian banks'riskiness and pro…tability are a¤ected by the evolution of the business cycle. Using Italian credit registry data, Bofondi and Ropele (2011) …nd that the quality of lending to households and …rms can be explained by a small number of macroeconomic variables mainly related to the general state of the economy, the cost of borrowing, and the burden of debt. Finally, Notarpietro and Rodano (2016) argue that the slowdown in GDP growth following the global …nancial crisis and the European sovereign debt crisis is a major contributor to the rise in bad debts in Italy.…”