Does macroeconomic stability matter for non-performing loans? The case of European Union countries.

The increase in macroeconomic uncertainty leads to inefficiency in the financial and banking sectors, resulting in a rise in Non-Performing Loans (NPLs). When macroeconomic uncertainty increases, financial institutions experience higher inefficiencies, reflected in increased NPLs, and with proper management solutions, the economy can move toward sustainability. This research analyzes the effect of severe macroeconomic shocks on the NPLs of the Iranian banking system using the Time-Varying Parameter Vector Autoregressions (TVP-VAR) model and a Panel Data Model. The study utilizes data from 2007 to 2021 on key macroeconomic indicators such as economic growth rate, inflation rate, interest rate, unemployment rate, and exchange rate, along with the ratio of Non-Current Claims to Total Facilities as an index of credit risk and the ratio of loans to total assets as a risk-taking index for banks. Our innovation lies in analyzing these variables dynamically, accounting for their correlation and mutual impact. The findings indicate that a 1% increase in inflation leads to a 0.0061% increase in NPLs, while a 1% rise in the unemployment rate results in a 0.0182% increase in NPLs. Conversely, a 1% increase in GDP growth reduces NPLs by 0.0036%. Furthermore, shocks to interest rates, exchange rates, and economic growth increase credit risk, with a 1% interest rate shock raising the default rate from 7.8% to 9.2% over time.

Having very high levels of non –performing loans (NPLs) has been one of the main problems of Albania since 2008 when the last global economic crisis started to affect Europe. In this paper, it was aimed to show how the changes in some macroeconomic figures of Albania have affected NPLs ratio in the banking sector knowing that it is also affected by some other factors related with the sector itself, borrowers and the legal system as well. The macroeconomic variables which were tested by using Least Squares Method are: real Gross Domestic Product (GDP) growth, unemployment rate, inflation rate, Albanian LEK (ALL)/EURO rate, remittances and foreign direct investments. The results show that NPLs has a negative correlation with remittances and unemployment rate (the latter is adverse according to economic theory) while its correlation with the other variables is not significant. The findings indicate that the huge decreases in remittances played a more important role than the general effects of the crisis in the continual and considerable increases of NPLs which have deteriorated financial tables of the commercial banks. As a result of this, the banks have become more selective in lending to business which also has caused NPLs rise (the vicious circle).Since the changes in these macroeconomic variables are, in general, not enough in explaining the big increase in NPLs, the other factors of NPLs such as bank risk management, structure of business entities and the legal system, which were not studied in this paper, should be analyzed to identify the other reasons behind this big problem. To decrease NPLs level; the banks should have more will to lend-especially to private entities- with paying attention to risk factor, the borrowers should try to find new partners/investors, markets to recover their businesses and meantime the government should encourage economic growth as well as strengthen and facilitate the legal system. DOI: 10.5901/mjss.2016.v7n3p162

Latest financial crisis resulted in non-performing loans growth what causes a lot of problems in financial stability of banking systems all around world. This paper examines the impulse response function of financial stability measured by capital adequacy ratio and non-performing loans in Bosnia and Herzegovina banking sector. Vector autoregression analysis was employed in order to explore how the Bosnia and Herzegovina banking sector financial stability responds to the impulse of changes in non-performing loans. Before running the vector autoregression analysis, the determination of appropriate lags length through the Akaike Information Criterion, Schwarz’s Bayesian Information Criterion and Hannan and Quinn Information Criterion was carried out. Quarterly data for capital adequacy and non-performing loans for the period 2000-2017, were used. Main goal of this research is analysis of financial stability response on changes in non-performing loans. Therefore, purpose of this paper is modelling relations between non-performing loans and financial stability. The study shows that financial stability of Bosnia and Herzegovina banking sector, measured by capital adequacy ratio, negatively reacts to changes in non-performing loans. Regression model have shown that increase in non-performing loans leads to deterioration in financial stability of the banking sector. Results indicate on long-term and short-term connection between these variables and causation of changes in financial stability from non-performing loans. These results indicate on importance of non-performing loans monitoring as one of the main sources of systematic risk which could threaten banking sector financial stability.

A well-capitalized banking system is crucial for maintaining macroeconomic stability, preventing financial crises, and bolstering the economy's resilience to shocks. Governments often strive to ensure adequate bank capitalization to foster stable economic growth. This article aims to assess the relationship between bank capitalization and macroeconomic stability in 34 European countries from 2010 to 2021, based on World Bank statistics.The study utilizes the principal components method to identify relevant indicators of bank capitalization and macroeconomic stability, canonical analysis and regression analyses to detail the interconnections between these blocks. The canonical analysis confirms a link between bank capitalization and macroeconomic stability indicators with a coefficient of determination of 0.617 signifying that 61.8% of the variance in macroeconomic stability is explained by fluctuations in bank capitalization.The article presents one fixed-effect and two random-effect regression models detailing the directions and strength of influence of independent variables (NPL, ROA, ROE - indicators of the bank capitalization level) on dependent variables (INFLATION, UNEMPL, GINI - indicators of macroeconomic stability). The Wald criteria and a p-value less than 0.05 indicated that the models with random effects (UNEMPL, GINI) were statistically significant.The results reveal that a 1% increase in non-performing loans correlates with a 0.25% rise in the unemployment rate, and a 1% increase in return on assets leads to a 0.08% increase in the unemployment rate. Additionally, a 1% increase in non-performing loans raises the Gini index by 0.05%, while a 1% increase in return on equity decreases the Gini index by 0.03%. Notably, the impact of return on assets on the unemployment rate and the Gini coefficient is not statistically significant (p-value greater than 0.05).These results can inform the forecasting of national indicators, the development of tools to ensure sufficient bank capitalization, and the formulation of effective macroeconomic policies, taking into account fluctuations in banks' capitalization levels as key financial intermediaries.

Around the world, financial institutions face massive risk on non-performing loans. As a result of the previous, financial institutions are obliged to review their lending policies. However, its nonpayment also leads to massive loss on banks in particular and the country in general. Non-performing credits (NPL) is a prevalent issue that influences budgetary markets dependability as a rule and banking industry suitability specifically. In recent decades, financial crises in various countries have often preceded the rise in non-performing loans (NPLs) in the banks' asset portfolios. The increase in NPLs is an adverse impact on the banking sector. Hence, understanding the determinants of NPLs is crucial to ensure the overall economy's efficiency and soundness. This research studies the factors affecting NPLs in the Malaysian banking industry. Through this research, the researchers can examine the relationships between the dependent variable, NPLs and independent variables, bank interest rate, inflation rate, and unemployment rate. The research uses monthly secondary data from 2015 to 2019, collected from the financial statements and DataStream and applies Descriptive Analysis, Normality Test, Correlation and Multiple Regression Analyses. The results indicate that unemployment and inflation significantly impact and relationship with the NPLs in the Malaysian banking industry. Meanwhile, the interest rate, despite its insignificance, positively affects the NPLs in Malaysia. The findings have important implications on policymaking, besides adding new knowledge to the existing literature.

In this study, the profitability of Rupali Bank PLC, a state-owned commercial bank in Bangladesh, is examined in relation to non-performing loans (NPLs) during the years 2015–2022. The analysis uses secondary data sourced from the annual reports of Rupali Bank PLC. Linear regression analysis is employed to examine how NPLs impact key profitability indicators, specifically Return on Assets (ROA) and Return on Equity (ROE). The findings reveal a significant negative correlation between NPLs and profitability, with higher NPL ratios leading to a decline in both ROE and ROA. Specifically, NPLs account for 76.1% of the variation in ROE and 62.8% of the variation in ROA. The study confirms the hypotheses: H1 (NPLs have a significant negative relationship with ROE) and H2 (NPLs have a significant negative relationship with ROA), highlighting the detrimental effect of rising NPL levels on the bank’s profitability. These results suggest that an increase in NPLs severely hampers the bank’s ability to generate profit and affects its overall financial health. The study underscores the importance of effective NPL management for sustaining profitability and ensuring financial stability in the banking sector. The findings have critical implications for policymakers and bank management, suggesting that enhanced credit risk management practices and stronger lending protocols are essential to mitigate the adverse effects of rising NPLs.

Purpose The purpose of this paper is to analyze the financial friction effect of non-performing loans (NPLs) on financial intermediation (FI) through empirical evidence from the Brazilian experience. Design/methodology/approach The authors develop a new variable, financial intermediation flow and a new indicator, FI, both measures of FI. To empirically test FI, the authors use a dynamic panel data framework that draws on 101 banks (December 2000 to December 2015). Findings An increase in NPL reduces FI. Thus, NPL amplifies financial friction in FI. This result holds in different time frames, such as the pre-crisis period, the crisis period and the post-crisis period. Practical implications The FI measure developed in this study offers the policymakers a possibility to monitor financial stability. Originality/value This study adds to this debate by proposing a measure of FI derived from financial flows. This measure allows one to estimate the role of NPL as a financial friction that can pose a threat to financial stability.

The main aim of the current study is to theorize an inclusive assessment of the factors of non-performing loans from banking sector in the setting of Pakistan. In this connection, adequate criticism of contemporary literature is being provided in context of relevant macroeconomic indicators which might aggravate the level of Non-Performing Loans (NPLs) in the conventional commercial banks of Pakistan as well as other regions. As per the study of literature, it has been found that corruption, political stability, accountability, investment profile, credit bank to private area and energy crisis affects the NPLs of conventional banks. In addition, factors like lending interest rate, unemployment, GDP and inflation do explain the variation in NPLs of the banking sector. Political stability, lack of capital capability, lack of efficiency, nominal emphasis on NPLs and lack of efficiency are the present issues being faced by the country. On the other hand, an increase in NPLs affects the internal factors including efficiency, profitability, bank size and capital. It has also been found that NPLs surge through inaccurate decisions by the organizations and political intervention in the banking sector. As per the outcomes of the studies, it has been observed that operational productivity and effectiveness have an adverse and significant relationship with NPLs. The lawmakers should accomplish a vigorous financial state of banks through manufacturing extra revenues. In this way banks will be in a better position to explore the credit worthiness of the creditors which will be ultimately helpful for better loan management. Once the key factors for increase in NPLs are determined, the banks will establish stable and efficient policies for loan management. The purpose behind determining these internal as well as external factors is not mere to highlight their significance but to chalk out measures and directions to control the stability of banking sector and the financial structure.

The authors suggest that what is largely missing from the research literature related to the field of financial institutions is an analysis of the relationships between problem loans and cost efficiency. Recent empirical literature suggests at least three significant links between these two topics. First, a number of researchers have found that failing banks tend to be very cost inefficient, that is, located far from the best-practice frontiers. Cost-inefficient banks may tend to have loan performance problems for a number of reasons, For example, banks with poor senior may have problems in monitoring both their cost and their loan customers, with the losses of capital generated by both these phenomena potentially leading to failure. The authors refer to this as the management hypothesis. Alternatively, loan quality problems may be caused by an event exogenous to the bank, such as unanticipated regional economic downturns. The expenses associated with the nonperforming loans that results can crate the appearance, if not the reality, of low cost efficiency. The authors refer to this as the hypothesis. The second empirical link between problem loans and productive efficiency appears in studies that use supervisory examination data. A relationship between asset quality and cost is consistent with the failed bank data, and suggests that the negative relationship between problem loans and cost efficiency holds for the population of banks as a whole as well as for failing banks. Third, some recent studies of bank efficiency have directly included measures of nonperforming loans in cost or production relationships. Whether this procedure improves or hinders the estimation of cost efficiency depends upon the underlying reason for the relationship between costs and nonperforming loans. Thus, important policy and research issues rest on identifying the underlying relationship between problem loans and measured cost efficiency: The primary cause of problem loans and bank failures Determining the most important supervisory focus for promoting safety and soundness at banks Deciding how to estimate the cost efficiency of financial institutions. The authors test four hypotheses bad luck, bad management, skimping, and moral hazard using Granger-causality analysis. The bad luck hypotheses posits that exogenous events can cause nonperforming loans to increase, and that after time passes the extra expenses associated with these loans will be reflected in lower measured cost efficiency. The bad hypothesis posits that poorly run banks do bad jobs at both cost control and at loan underwriting and monitoring, and that after time passes this slack leads to increases in problem loans as borrowers fall behind on their loan repayments. The skimping hypothesis posits that banks might achieve low costs by under-spending on loan underwriting and monitoring in the short run, and after time passes this slack results in increases in problem loans. The authors test the moral hazard hypothesis by testing whether equity capital negatively Granger-causes nonperforming loans. The authors results suggest that the inter-temporal relationships between loan quality and cost efficiency run in both directions. Increases in nonperforming loans tend to be followed by decreases in measured cost efficiency, suggesting that problem loans cause banks to increase spending on monitoring, working out, or selling off problem loans. The data favor the bad hypothesis over the skimping hypothesis decreases in measured cost efficiency are generally followed by increases in nonperforming loans, evidence that bad practice are manifested not only in excess expenditures, but also in subpar underwriting and monitoring practices that eventually lead to nonperforming loans. For a subset of banks that are consistently efficient, however, increases in measured cost efficiency precede increases in nonperforming loans, consistent with the skimping hypothesis that banks trade short-run expense reductions for long-run reductions in loan quality. Finally, decreases in bank captial ratios precede increases in nonperforming loans for banks with low captial ratios, evidence that thinly capitalized banks may respond to moral hazard incentives by taking increased portfolio risks. The authors suggest that if these results can be confirmed by future research, their findings have research and policy implications. The inter-temporal relationships revealed by Granger-causality techniques are indicative of which among the alternative hypotheses are consistent with the data. Future research might use other statistical techniques to reveal the inter-temporal relationships between loan quality and productive efficiency in financial institutions; attempt to decompose the determinants of loan quality into internal versus exogenous factors; or focus on the empirical consequences of controlling for loan quality when estimate efficiency.

This study examines the impact of the 2008 global financial crisis on the stability of financial systems across 203 countries during the 2006–2009 period, covering pre-crisis, crisis, and post-crisis phases. Countries are grouped into four categories based on income and institutional status: 31 high-income OECD countries, 29 high-income non-OECD countries, 108 middle-income countries, and 35 low-income countries. Data on seven financial stability indicators, including bank Z-score, non-performing loans, bank capital to total assets, bank credit to deposits, regulatory capital to risk-weighted assets, liquid assets to short-term funding, and provisions to non-performing loans, are sourced from the World Bank’s Global Financial Development Database (GFDD). Non-parametric Mann-Whitney-Wilcoxon tests are applied to assess changes in these variables across the pre-crisis, crisis, and post-crisis periods. During the run-up to the crisis, none of the financial stability measures displayed statistically significant early warning signals across any income group. During the crisis, a significant increase in non-performing loans is observed in high-income OECD and middle-income countries, while liquid assets significantly decline in high-income non-OECD countries. No significant deterioration is detected in any stability measure for low-income countries. In the post-crisis period, bank capital and regulatory capital increased significantly in high-income OECD countries, while regulatory capital rose in high-income non-OECD and middle-income countries. The findings suggest that the crisis had a more prolonged and deeper impact on high-income OECD and middle-income countries, with differing policy responses observed across income groups. This research opens new prospects for comparative policy analysis in crisis response and underscores the importance of income-based financial system resilience assessment. It may serve as a valuable reference for international institutions, regulators, and scholars working to design more adaptive and context-specific financial stability frameworks. Future research could expand on these findings by incorporating micro-level data or exploring the role of institutional quality and regulatory effectiveness in shaping crisis outcomes.

The COVID-19 pandemic has created unprecedented economic disruptions worldwide, with the banking sector being one of the most affected industries. This paper aims to explore the impact of various factors on the nonperforming loans (NPLs) of Vietnamese commercial banks during the COVID-19 pandemic by employing a Bayesian hierarchical regression approach. The analysis highlights that the pandemic has led to a significant and positive increase in the NPLs ratio of Vietnamese banks, indicating that the financial health of these institutions has been adversely affected by the crisis. Moreover, the study uncovers that the impact of COVID-19 on NPLs is not uniform across all banks. Specifically, state-owned banks have experienced a more pronounced increase in NPLs compared to their private counterparts. This disparity suggests that state-owned banks may be more vulnerable to economic shocks due to their broader exposure to sectors and enterprises heavily impacted by the pandemic. The findings of this research offer critical insights into the dynamics of the banking sector in Vietnam during a global health crisis and emphasize the need for targeted policy interventions. The results also underscore the importance of understanding the differential impacts of such crises on various types of financial institutions. By identifying the factors that contribute to the increase in NPLs, this study provides valuable information that can inform future strategies aimed at enhancing the resilience of the banking sector against similar economic disruptions. Furthermore, the findings highlight the effectiveness of the policies implemented during the pandemic to support the banking sector, suggesting areas for improvement and further research.

The objective of the paper is to evaluate the financial stability in the banking sector of Bangladesh on the basis of Macro-Financial Indicator (MFI) and Macroeconomic variables (MEV) of the IMF. The time period 1997 to 2012 has been taken in analyzing MFI while in analyzing MEV, the time period 1990-2012 has been considered. The analysis of trend in MFI indicates that banking sector in Bangladesh demonstrated a moderate level of stability in the recent years despite of dismal performance of State Own Commercial Banks (SCBs) and Development Financial Institutions (DFIs). The Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs) stand on sound footing in resilience in terms of MFI's performance. The paper finds that correlation coefficient between Nonperforming Loan (NPL) and Gross Domestic Product (GDP) is -0.67 for the sample period 1991-2012 implying that increase of GDP pushes down NPL that ensures financial stability in banking system in Bangladesh. The correlation coefficient between real lending rate and GDP is -0.52 and the correlation of real lending rate with NPL are 0.63 which implies that prevailing high lending rate is distressing for the banking system. An estimated correlation coefficient between Current Account Balance (CAB) and NPL is -0.72 which implies a good position or surplus in CAB leading to decrease NPL in the banking system which helped financial stability in the recent time.

In the South Asian region, a major cause of an increase in non-performing loans (NPL) is the bank’s adverse selection of borrowers. Using the GMM estimator, we empirically studied the bank-specific, industry specific and macroeconomic specific determinants of non-performing loans of banks in South Asian countries (Bangladesh, India, Nepal and Pakistan) from 1997 to 2012 and found that the adverse selection hypothesis of Stiglitz and Weiss (1981) was still effective. We found evidence for the bad luck, bad management, skimping and moral hazard hypotheses of Berger and DeYoung (1997) and their effect on the credit risk determination but we contributed to the literature by showing that ‘moral hazard type II’ (moral hazard between the bank management and the depositors) significantly affected the increase of non-performing loans. Bank size, industry concentration, inflation and GDP growth rate all significantly affected the sample countries’ non-performing loans. Empirical results showed a moderate degree of persistence of NPL and a late-hit of the global financial crisis in the region’s banking sector.

PurposeThis paper aims to deal with the perceptions of banks’ managers about some criteria for assessing creditworthiness related to firms and how these criteria affect non-performing loans (NPLs). The paper wants to respond to the following research question: “Which criteria influence the magnitude of NPLs?” The evidence is based on the improvement of credit quality in the Italian banking system, which the authors study in aggregate and size-specific analyses, creating two subsamples (large and small banks).Design/methodology/approachThe methodology used was a mixed method approach. The values of the variables were quantified according to the information derived from Thomson Reuters (Eikon, Datastream), the financial reporting of the banks and questionnaires directly administered to the bank managers.FindingsThis research about loans selection criteria provides useful indications for “The Basel Framework”. The results show that managers of the large banks are improving the approach of allocating the loans; the managers of the small banks are getting worse in the period 2006-2016. Therefore, it should be valuable to build a new standard about qualitative and quantitative criteria to recognize credit risk. In particular, these criteria could be adopted to reduce NPLs, and they should be different in small banks and large banks.Originality/valueThe study is part of empirical research investigating the causes of the significant increase in NPLs in the Italian banking system in 2006-2016. Most research interprets the increase in NPLs in the Italian banking system only as an effect of the crisis in the Italian entrepreneurial system. This research offers a different interpretation of the problem, interpreting the phenomenon as a delay of the banking system in investing in an effective information criterion.

The size of non-performing loans plays a vital role in banking stability of any given economy. The paper investigates the resilience and stability of banks amidst the deteriorating quality of its assets since the last Global financial crisis. This study examined the effect of non-performing loans on banks financial stability in Kenya’s commercial banks using secondary data for the period January 2015 to December 2019. A multiple regression model was utilised in analysing the data. Non-performing loans as measured by non-performing ratio had a positive and statistically significant relationship with banks financial stability as measured by Z a-score. The results implied that non-performing loans in Kenya’s commercial banks affects the banks financial stability. Loans to deposit ratio results specified a positive and non-statistically insignificant relationship with banks financial stability. The results inferred that loan to deposit ratio do not affect the banks financial stability. Inflation rate results had a positive but statistically significant relationship with banks’ financial stability indicating that inflation rate affects banks’ financial stability. The results for loan growth had a negative but statistically significant relationship with banks financial stability. The study recommended implementation of measures that curb increase in non-performing loans as they threaten banking financial stability.