Macroprudential policies and banks' non-performing loans: Evidence from across the globe

A stable financial system is significant for an economy. Commercial banks play a critical role in facilitating the flow of credit and boosting the productivity of businesses through investment funding. In addition to receiving deposits, commercial banks provide loans to customers, exposing them to credit risk in the form of non-performing loans (NPL). This study aims to analyze the determinants of NPL and stress-test macro variables in the Indonesian banking system. The findings of this study, which used a data panel (Stata 17) and the Monte Carlo Stressing test of the Value at Risk (VAR) approach by studying a sample of 43 Commercial Banks listed on the IDX from 2008.1 to 2023.4, are significant. The main findings are Non-Performing Loan lag -1 (NPLt-1), Loan Deposit Ratio (LDR), Interest rate (SBI) and inflation (INF), and the significance of Non-Performing Loan (NPL). The results of the NPL Stress Scenario based on the VaR approach with interest rate and inflation shock carried out are still much lower than based on the provisions of Bank Indonesia Regulation Number 06/10/PBI/2004 concerning the Health Level Assessment System for Commercial Banks, the NPL ratio is 5 percent. It can be concluded that the NPL condition of commercial banks in Indonesia from 2008 to 2023 is still below the specified limit to face serious credit problems. These significant findings can engage and interest the audience, particularly those involved in the Indonesian banking system and macro prudential policies, and provide them with valuable insights. Keywords—Commercial Banks; Non-Performing Loan; Value at Risk

This research aimed to analyse the effect of monetary policy and macroprudential policy on credit cycle for 41 conventional banks between 2010 and 2023 in Indonesia. Initially, four models using POLS and fixed effect models were executed in this paper. Subsequently, a Durbin-Wu-Hausman test identified issues of endogeneity in the models. Ultimately, a panel GMM estimation was employed. The findings revealed that central bank rate had a positive influence on credit cycle. While macroprudential policy had a negative impact on credit cycle. The interaction effect of macroprudential and monetary policies had an influence on lowering the credit cycle. The credit cycle is influenced negatively and significantly by Non-performing loans (NPL) and capital adequacy ratio (CAR). Meanwhile, inflation, economic growth and loan-to-deposit ratio (LDR) had a positive effect on the variable. The findings offer valuable policy insights for policymakers in Indonesia. Central banks should be aware of how banks’ credit cycles behave in response to shocks from monetary and macroprudential policies.

Using a novel panel data set we study the influence of monetary and macro-prudential policies on non-performing loans as a measure of credit risk in Indonesian banking industry from Q1 2010 to Q4 2022. The panel homogeneity assumption was verified through the utilization of the Chow and Roy-Zellner tests. The findings showed that the model was not homogenous, necessitating the use of the Pooled Mean Group (PMG) estimator. The results indicated that monetary and macro-prudential policies significantly impacted credit risk. Furthermore, tight monetary and macro-prudential policies increased and reduced credit risk in the long run, respectively. The findings also showed that a loosening monetary policy reduced credit risk in the short run. Therefore, higher authorities must establish effective monetary and macro-prudential policies to reduce the non-performing loan ratio and maintain credit risk in Indonesia's banking industry.

ABSTRACTThe increasing importance of transparency practices and the improving status of bank competition in China are rarely explored in nonperforming loans (NPLs) literature. Thus, the purpose of this study is to examine banking system transparency and competition along with macroeconomic and bank-specific variables as determinants of NPL. We use the two-step system GMM dynamic panel model for Chinese banks based on annual data from 2000 to 2014. Our results indicate that high transparency in the Chinese banking system decreases poor-quality assets but not in the case of government-owned banks, whereas increase in competition increases NPL. Moreover, we find mixed results in the context of macroeconomics and bank-specific variables. Our study has practical implications in risk management practices and macro prudential policies.

The impact of oil price movements on bank non-performing loans: Global evidence from oil-exporting countries

The COVID-19 pandemic shows that macroprudential policy is one of the crucial instruments in mitigating economic shocks and ensuring the financial system. This study examines the effectiveness of macroprudential policies on banking credit growth in Indonesia from 2015 to 2023 by analyzing the impact of the Debt-to-Income Ratio (DTI), Minimum Reserve Requirement (GWM), Capital Adequacy Ratio (CAR), and Non-Performing Loans (NPL). This study aims to give regulators insights into optimizing policy combinations to mitigate financial risks while supporting sustainable economic growth. The results of panel data regression revealed that DTI and CAR significantly impact banking credit growth. In contrast, GWM and NPL didn’t have a significant effect. These findings emphasize the critical role of macroprudential policies in maintaining a balance between credit growth and financial stability, especially in times of economic uncertainty. This study contributes to policymakers and financial regulators optimizing macroprudential frameworks to enhance financial resilience and support sustainable credit distribution in Indonesia’s banking sector.

High credit risk will affect the health of the bank which will be a factor causing systemic risk. This research aims to analyze the effectiveness of macroprudential policy in controlling banking credit risk in Indonesia. This research uses Non-Performing Loans (NPL) as an indicator of credit risk. Meanwhile, as indicators of macroprudential policy, policy instruments such as LTV (Loan to Value), RIM (Macroprudential Intermediation Ratio), DTI (Debt to Income), and COC (Ceilings on Credit). The analytical method used in this research is panel data regression analysis with a fixed effect model (FEM). The research results show that simultaneously each macroprudential policy instrument, be it RIM, DTI, and COC, influences banking credit risk in Indonesia, and easing policy on LTV is unable to reduce NPLs.

Purpose The current study aims to investigate the determinants of nonperforming loans (NPLs) in the GCC economies during the period spanning 2000 to 2018. It also examines whether the worldwide financial crisis of 2007–2008, which brought the issue of non–performing loans to the greater attention of academics and policymakers, had a substantial impact on NPLs in this region. Design/methodology/approach The sample consists of 53 conventional banks from GCC countries, and the basic data for the study is obtained from various sources such as Bankscope, IMF World Economic Outlook, World Bank and Chicago Board of Options Exchange Market Volatility Index. The estimations were done by dynamic panel data regression modeling using system generalized methods of moments. Findings The findings reveal that both, the non-oil real GDP growth rate and inflation have favorable effects on NPLs. On the other hand, domestic credit to the private sector and the volatility index have an adverse effect on NPLs. Furthermore, the period-wise analysis shows that the relevance and significance of the determinants of NPLs vary between the precrisis and postcrisis periods. It is also reflected through the intercept dummy, which is found to be significant, indicating that the financial crisis, as a global economic factor, had a significant impact on NPLs. A number of robustness tests are applied, which indicate that the results are mostly robust and consistent in terms of the significance of the explanatory variables and the direction of their relationship with the dependent variable. Practical implications Policymakers and bank authorities must strive to maintain a healthy economy and implement macroprudential policies to improve the financial stability of banks and reduce credit risk. Originality/value To the best of the authors’ knowledge, this is likely the first study that empirically investigates the influence of the financial crisis on NPLs in the context of GCC economies. In addition, the research spans 19 years to produce more conclusive results.

Banks play a crucial role in bridging fund suppliers and demanders, thereby facilitating economic development by channeling idle funds into the economy. For banks to effectively perform their functions, the financial transmission mechanism is essential. Non-performing loans (NPLs) significantly impact bank profitability, credit positions, and overall economic development. This study investigates the relationship between industrial production and non-performing loans in Turkey using a time-varying Granger Causality test. Monthly data from January 2005 to July 2024 was utilized to examine the interconnection between the industrial production index and non-performing loans. The research uniquely contributes to the existing literature by applying a sophisticated time-varying Granger Causality methodology, investigating the dynamic relationship between economic activity and credit risk, and providing insights into the temporal variations of industrial production and non-performing loans within the Turkish banking sector. Key methodological approaches include utilizing a recursive evolving window algorithm, employing bootstrap simulations to enhance estimation precision, and analyzing causal relationships through multiple computational techniques. Findings underscore the importance of adaptive risk management strategies and the need for flexible macroprudential policies capable of responding to the evolving economic landscape.

In this study we propose a new determinant of non-performing loans for the case of the Greek banking sector. We employ aggregate yearly data for the period 1996- 2016 and we conduct a Principal Component Analysis for all the Worldwide Governance Indicators (WGI) for Greece, aiming to isolate the common component and thus to create the GOVERNANCE indicator. We find that the GOVERNANCE indicator is a significant determinant of Greek banks’ non-performing loans indicating that both political and governance factors impact on the level of the Greek non-performing loans. An additional variable that also has a statistically significant impact on the level of Greek non-performing loans, when combined with WGI in the dynamic specification of our model, is systemic liquidity risk. Our results could be of interest to policy makers and regulators as a macro prudential policy tool.

In this study we propose a new determinant of non-performing loans for the case of the Greek banking sector. We employ aggregate yearly data for the period 1996-2016 and we conduct a Principal Component Analysis for all the Worldwide Governance Indicators (WGI) for Greece, aiming to isolate the common component and thus to create the GOVERNANCE indicator. We find that the GOVERNANCE indicator is a significant determinant of Greek banks’ non-performing loans indicating that both political and governance factors impact on the level of the Greek non-performing loans. An additional variable that also has a statistically significant impact on the level of Greek non-performing loans, when combined with WGI in the dynamic specification of our model, is systemic liquidity risk. Our results could be of interest to policy makers and regulators as a macro prudential policy tool.

This research presents a comparative examination of the impact of non-performing loans (NPLs) on the performance of foreign banks versus indigenous banks operating in Ghana, concentrating on the Return on Assets (ROA), Return on Equity (ROE), and Liquidity Ratio (LIQDR). Utilizing balanced panel data from 2007 to 2021, a panel fixed-effects estimation technique was employed via EViews 12 to examine credit risk heterogeneity across bank ownership structures. The findings indicate an inverse but statistically insignificant association between NPLs and performance indicators (ROA, ROE, and LIQDR) for indigenous banks. This outcome suggests their greater vulnerability to asset quality deterioration, possibly due to less robust risk management. Conversely, foreign banks exhibit a contradictory direct and statistically significant relationship between NPLs and both ROA and ROE, whereas the effect on LIQDR remains insignificant. This outcome implies that foreign banks leverage superior credit risk mitigation, robust capital buffers, or distinct operational efficiencies (e.g., aggressive write-off policies or high-yield lending) to absorb or manage the NPL impacts more effectively. This study offers original insights by empirically differentiating performance outcomes for foreign and local banks facing credit risk in an emerging market. Practically, these findings necessitate enhanced credit monitoring and capital reform for indigenous banks. Policymakers should also consider capacity-building support for local institutions. Future studies could scrutinize the mediating function of bank governance and specific macroprudential policies.

PurposeThe authors examine the optimal consumption decisions of households in a micro-founded framework that introduces endogenous default. They study default in the context of a two-period process, assuming three non-overlapping steps of non-payment: delinquency, non-performing loans and bankruptcy (default).Design/methodology/approachIn their model, the authors extend the analysis of loan default to two periods and include agent heterogeneity by considering also saving households. In the optimization problem, the authors obtain first-order conditions for borrowers who do not repay all of their loans (comparing them to those who fully repay them) and also for savers. In addition, by using nonlinear Generalized Method of Moments (GMM), they obtain consistent estimates of the household preference parameters and present the impulse responses of borrowers' consumption to demand shocks.FindingsThe authors derive an augmented consumption Euler equation for borrowers, which is a function inter alia of an expected default factor. They estimate this equation and find non-negligible differences in preference parameters relative to values reported in the literature. Further, an ordering by size of the household discount factors is provided empirically. Finally, the impulse responses of borrowers' consumption to a demand shock are found to last more for borrowers who do not fully repay their debts.Originality/valueThis work represents a promising line of research by introducing default in one of the basic components of DSGE models, making the latter more appropriate for analyzing monetary and macro-prudential policies.

Purpuse: This article aims to assess the contribution of the Albanian banking system to the European Union integration process by analysing its progress and challenges in alignment with accession criteria and compliance with EU acquis. Design/ Methodology / Approach: The research spans 12 years (2011-2022) of monitoring by the European Commission. The methodology involves a thorough review and content analysis of annual EU integration progress reports for Albania, uncovering banking system-related criteria, requirements and recommendations enhanced by a thematic analysis identifying recurring themes and report patterns over the years. Findings: The analyses confirm the hypothesis that the Albanian banking system has made significant progress in aligning with EU accession criteria, as evidenced by positive evaluations of the European Commission, mainly in macroeconomic and financial stability, but still ample room for lending and financial inclusion improvement. The progress reports over the years have consistently ascertained the positive impact of the monetary and macroprudential policy, while progress in non-performing loans (NPLs) is acknowledged, ongoing concerns persist regarding the extensive use of the Euro in the economy. Originality/Value: This paper holds multifaceted value as a resource for policymakers, researchers, and those engaged in EU integration. It comprehensively assesses the Albanian banking system’s progress and offers practical recommendations, with a particular emphasis on improving financial education as a key factor on the demand side. Using a long-term, data-driven approach, it uniquely examines the system’s contributions and challenges in meeting EU standards, making it essential for Albania’s European Union integration efforts.

For more than a decade, banking systems of many countries around the world have been trying to recover from the effects of the global financial crisis. The dynamics of one of the most important indicators of the effective operation of the banking sector - the level of fulfilment of loan obligations by the debtor - is analysed in the present paper. A nonperforming loan ratio (NPL) more than doubled in the EU in the period from 2008 until 2012, and the value of this indicator increased more than 20 times in the period from 2008 until 2017 in Ukraine. Many countries worldwide have focused on activities that aim at minimizing the risks associated with lending. The experience of more than 4,000 banks in 46 countries shows that one of the most effective macroprudential tools used by European central banks for mortgage loans is the loan-to-value ratio (LTV). According to research, central banks have recommended lowering the level of LTV. Thus, in Poland, the loan-to-value ratio used to be 100% and even higher, but from 2017 the maximum level should not exceed 80%. In China, the LTV level has dropped to 40% for the secondary real estate market. In Germany, the maximum loan-to-value ratio is 80%, and mortgages with LTV of less than 60% are financed at more favourable conditions by banks. Using macroprudential policy has made it possible to stabilize the situation in the banking system, therefore in 2020 the average level of non-performing loans in the EU decreased to 2.8%. In Poland, the level of NPL is slightly higher and is 6.2%, however in Ukraine the figure remains high and reaches 41%. This study aims to identify the dependence between the adequacy of fulfilment of the collateral and the debtor’s loan obligations, which is extremely important in order to stabilize and increase the liquidity and profitability of banking institutions. The obtained results are based on the assessment of 200 loan cases for which the execution time has come.