The up-coming crisis and loan portfolio quality in Romania and Bulgaria

Abstract

We analysed the relationship between the non-performing loan ratio and macroeconomic variables as a source of systemic risk, in order to assess the vulnerability of the banking sector to bad-loan performance on a macroeconomic level by panel regression. The theory of procyclicality between net exports, GDP, foreign direct investments and the non-performing loan ratio was proven. Increased economic activity improved the loan portfolio quality of the banking sector, as indicated by a lower NPL ratio. Due to a high share of loans denominated in a foreign currency and the fact of productivity gains in the tradable sector, the appreciation of the real exchange rate contributed to an improvement in loan portfolio quality. A slowdown in economic activity is likely to accelerate the non-performing loan ratio in Bulgaria and Romania.