Increase In Non-performing Loans Research Articles

NPLs in Europe: The Role of Systematic and Idiosyncratic Factors

With an average ratio at 5.7% in March 2016, Non-Performing Loans (NPLs) in the European Union (EU) remain up to three times higher than in other global jurisdictions and, especially in some EU countries, undermine the stability of the banking system. Is the high level of NPLs due to systematic or idiosyncratic factors? Surprisingly, this question is left unanswered in past papers. We have three main results. Firstly, systematic variables have a strong influence on the NPLs ratio, while idiosyncratic variables reveal a limited influence. Secondly, a GDP growth of 1% around its sample mean reduces the NPLs ratio by 0.2% in the short run and by 3.1% the long run. Thirdly, the cumulative impact of the Great Recession, the European sovereign debt crisis and enforcement inefficiency explain the 79% increase in NPLs in GIPSI countries (Greece, Ireland, Portugal, Spain and Italy), as compared to 45% in the other European countries.

(The Beginning of the China-Led New Financial Order and Korea's Countermeasures)

English Abstract: The emergence of China in the international financial order can be analyzed in three aspects: strengthening its position within the IMF system led by the West, establishing a new financial order through multilateral development banks (MDBs) like the AIIB and NDB, and the internationalization of the renminbi (RMB). China has steadily demanded an increase in its share in the IMF. Following the effectuation of the reform plan in 2016, China became the third largest member of the IMF and the RMB is now included in the SDR basket. China also succeeded in launching the AIIB by formulating a consensus on the necessity for launching an alternative multilateral development bank in Asia where the ADB had a monopoly. On the other hand, RMB internationalization is executed based on a set of internal and external goals: stabilizing inflation and the engine for internal reform, and consolidating the international status of China. As a result, RMB settlements accounted for approximately 2% in world trade, while investment accounted for 16.6% in 2015. However, the RMB still accounts for only 0.6% of the global bond market, and only 1.1% of global foreign reserves. As such, although the internationalization of the RMB has achieved some degree of success, it is hardly keeping up with the extent to which China’s economic power is growing.For the China-led financial order to take root, China should continue to pursue further reforms and openness regarding free convertibility, capital accounts, and the exchange rate. China, however, is maintaining a cautious approach. Some of the reasons for this are as follow. First, there are concerns about an outbreak of financial crisis through the opening up of China’s capital account. Second, there are fears that there will be an increase of non-performing loans and decrease of interest rate in the event of non-interference by China’s financial authorities. As China also has tried to maintain a managed floating system and to allow capital opening only on an experimental basis, it will not be easy for it to expand its influence in the international financial market in a short period of time. Moreover, as the recent appreciation of the yuan has weakened, the impetus for internationalization of the RMB has weakened.Korean Abstract: 2016년 들어 AIIB가 운영을 개시하고, 위안화가 IMF의 SDR 통화바스켓에 편입되면서 국제금융질서에서 중국의 위상이 날로 높아지고 있다. 이에 본 연구는 중국 주도의 신금융질서 태동의 의미와 전망, 중국 중심 국제금융기구의 구조와 운영, 위안화 국제화와 통화블록 형성 가능성 등을 분석하였다. 이를 바탕으로 한국의 중장기 정책대응 방향과 함께 기업의 인프라 건설 참여방안, 민간 금융기관의 인프라금융 참여방안, 정부의 정책 지원방향을 제시함으로써 급변하는 국제금융질서에 대한 한국의 대외 입장 정립과 국익 확보에 기여하고자 하였다.

The Interrelationship between Liquidity Creation and Capital in Vietnamese Banking

We examine the interrelationship between liquidity creation and capital in Vietnamese banking where mainly includes small banks between 2007 and 2015 by using the three-stage least squares in a simultaneous equation framework. This appears that a strong expansion in liquidity creation was mainly contributed by large banks. Furthermore, we find that an increase in non-performing loans is associated with greater liquidity creation, supporting a moral hazard hypothesis. Finally, our findings indicate the two-way negative relationships between liquidity creation and capital. This suggests that Basel III could reduce liquidity creation but also that greater liquidity creation could increase banks’ insolvency. Therefore, this trade-off between the benefits of financial stability induced by tightening capital requirements and those of enhanced liquidity creation has important implications for Vietnamese authorities in strengthening the banking system.

The Quantity of Corporate Credit Rationing with Matched Bank-Firm Data

This paper provides measures of credit rationing in the market of term loans to Italian non-financial firms. We identify non-price allocations of credit by exploiting a unique bank-firm dataset of more than 5 million observations, which matches the quantity and the cost of credit available from the Credit Register with a number of bank- and firm-specific characteristics from different sources of microdata. We propose an approach that endogenously identifies all the bank-firm transactions subject to credit rationing, thus circumventing aggregation biases stemming from the use of less detailed information. The estimates suggest that in the Italian case, rationing mostly reflected an increase in non-performing loans in banks' portfolios and a decline in available collateral. Borrowers' characteristics played a minor role, although banks did switch their supply of funds in favour of firms with greater creditworthiness after the outbreak of the sovereign debt crisis.

Empirical evidence on disclosure and risk-taking of banks in Ghana

Purpose This paper aims to empirically examine the relationship between disclosure and risk-taking of banks in Ghana. The study also aims to gain an insight into the general risk-taking behaviour of banks in Ghana for the period 2007-2011. Design/methodology/approach The study used panel regression model and relate risk-taking to disclosure, controlling for bank size, profitability, liquidity and treasury bill rate. Disclosure scores from a disclosure index are used as a measure of disclosure, likewise Z-score as a measure of total risk. Also, the ratio of provisions for loan losses to gross loans by each bank for each year was used to examine the general risk-taking behaviour of Ghanaian banks. Findings The study revealed that the election year and the immediate subsequent year are characterized by an increase in non-performing loans. Greater disclosure is associated with more risk-taking and vice versa. This implies that market discipline is not effective in Ghana. Treasury bill rate, profitability and liquidity were found to be economically meaningful and statistically significant in influencing risk-taking of banks in Ghana. Originality/value As there are relatively few studies conducted in this area, specifically among banks in Ghana, this study will broaden the scope of the literature on disclosure and risk-taking by providing empirical evidence.

The Effects of the Changes in Some Macroeconomic Indicators on the Non – Performing Loans in the Albanian Banking Sector (2007 – 2014)

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

Real estate investments and financial stability: evidence from regional commercial banks in China

ABSTRACTThe 2008 US subprime mortgage crisis demonstrated how developments in real estate markets can cause instability in the banking sector and raised concerns in many emerging economies with significant real estate development and a rapidly growing commercial banking sector, particularly in China. There is clear evidence that commercial banks in China, especially regional commercial banks, have lent significantly to the real estate sector. The recent slowdown in the housing market in China and the increase in nonperforming loans (NPLs) in China's commercial banking sector motivated us to investigate the connection between real estate markets and banking stability. This paper proposes three testable hypotheses linking the growth of investment in real estate and the stability of regional commercial banks in China, measured by NPLs. Our empirical results reveal a close connection between the growth of investment in real estate and the NPLs among regional commercial banks, and its sensitivity to real estate market cycles. When real estate market activity declines, our results suggest, regional commercial banks can find themselves in trouble if they have significant exposure to one type of (real estate) asset. In addition, we find that regional bank competition plays a critical role in defining the relationship between bank stability and real estate investment activity.

The Efficiency of Credit Portfolio Management in Pakistan’s Banking Sector

This study highlights the differences in performance of commercial banks operating in Pakistan in the context of credit portfolio management. Specifically, we look at their credit allocation policies and outcomes in the shape of nonperforming loans (NPLs). We categorize a sample of 34 banks into four major groups: public, private, Islamic and foreign banks. The study tests several hypotheses related to the overall efficiency of banks’ credit portfolio management over time as well as the drivers of NPLs and priority sectors for lending across these four categories. The findings broadly suggest that public banks tend to suffer most from NPLs, whereas Islamic and foreign banks manage their portfolios more efficiently. NPLs are highest in the priority lending sectors across all types of banks, which underscores the inefficiency of managerial decision-making when managing credit portfolios. Over time, at an aggregate level, all four types of banks have become less efficient, as reflected by the increase in NPLs as a percentage of gross credit and assets.

(The Beginning of the China-Led New Financial Order and Korea's Countermeasures)

English Abstract: The emergence of China in the international financial order can be analyzed in three aspects: strengthening its position within the IMF system led by the West, establishing a new financial order through multilateral development banks (MDBs) like the AIIB and NDB, and the internationalization of the renminbi (RMB). China has steadily demanded an increase in its share in the IMF. Following the effectuation of the reform plan in 2016, China became the third largest member of the IMF and the RMB is now included in the SDR basket. China also succeeded in launching the AIIB by formulating a consensus on the necessity for launching an alternative multilateral development bank in Asia where the ADB had a monopoly. On the other hand, RMB internationalization is executed based on a set of internal and external goals: stabilizing inflation and the engine for internal reform, and consolidating the international status of China. As a result, RMB settlements accounted for approximately 2% in world trade, while investment accounted for 16.6% in 2015. However, the RMB still accounts for only 0.6% of the global bond market, and only 1.1% of global foreign reserves. As such, although the internationalization of the RMB has achieved some degree of success, it is hardly keeping up with the extent to which China's economic power is growing. For the China-led financial order to take root, China should continue to pursue further reforms and openness regarding free convertibility, capital accounts, and the exchange rate. China, however, is maintaining a cautious approach. Some of the reasons for this are as follow. First, there are concerns about an outbreak of financial crisis through the opening up of China's capital account. Second, there are fears that there will be an increase of non-performing loans and decrease of interest rate in the event of non-interference by China's financial authorities. As China also has tried to maintain a managed floating system and to allow capital opening only on an experimental basis, it will not be easy for it to expand its influence in the international financial market in a short period of time. Moreover, as the recent appreciation of the yuan has weakened, the impetus for internationalization of the RMB has weakened. Korean Abstract: 2016년 들어 AIIB가 운영을 개시하고, 위안화가 IMF의 SDR 통화바스켓에 편입되면서 국제금융질서에서 중국의 위상이 날로 높아지고 있다. 이에 본 연구는 중국 주도의 신금융질서 태동의 의미와 전망, 중국 중심 국제금융기구의 구조와 운영, 위안화 국제화와 통화블록 형성 가능성 등을 분석하였다. 이를 바탕으로 한국의 중장기 정책대응 방향과 함께 기업의 인프라 건설 참여방안, 민간 금융기관의 인프라금융 참여방안, 정부의 정책 지원방향을 제시함으로써 급변하는 국제금융질서에 대한 한국의 대외 입장 정립과 국익 확보에 기여하고자 하였다.

Commercial Mortgage Termination and Pricing: Theory and Evidence from 1970 to 2015

Commercial mortgage delinquency and default rates increased to unprecedented levels during the 2007–2009 financial crisis. Traditional credit risk models and underwriting models failed to adequately predict the increase in nonperforming loans resulting from precipitous price declines in an increasing number of commercial properties. These effects, in turn, spilled over into the commercial mortgage-backed securities (CMBSs) market. In this paper, we provide a comprehensive analysis of many topics relating to commercial mortgages, including (1) the determinants of mortgage termination and loss severity, (2) the pricing of commercial mortgages and CMBSs, and (3) the role of special servicers. Our synthesis of the extant commercial real estate literature can be useful to borrowers, originators, underwriters, investors, regulators, and policymakers, especially in relation to developing improved credit risk models and better lending standards.

Macro-Financial Linkages and Heterogeneous Non-Performing Loans Projections: An Application to Ecuador

We propose a stress testing framework of credit risk, which analyzes macro-financial linkages, generates consistent forecasts of macro-financial variables, and projects non-performing loans (NPL) on the basis of such forecasts. Economic contractions are generally associated with increases in NPL. However, despite the common assumption used in the empirical literature of homogeneous impact across banks, the strength of this relationship is often bank-specific, and imposing homogeneity may lead to over or underestimating the resilience of the financial system to macroeconomic woes. Our approach accounts for banks’ heterogeneous reaction to macro-financial shocks in a dynamic context and potential cross-sectional dependence across banks caused by common shocks. An application to Ecuador suggests that substantial heterogeneity is present and that this should be taken into account when trying to anticipate inflections in the quality of portfolio.

Albanian Banking System The Past the Present and the Futuree

The Albanian banking system is a relatively new system and has been developing mainly during the last 10-15 years, whereas its significant growth and progress was recorded 10 years ago, via the privatization of Savings Bank. Along with privatization, the development path included, also, greenfield investments form foreign banks and capital pooling by Albanian venture capitalists. This process has undoubtedly been crucial and instrumental, in providing the economy with the so-much-needed finance, as the actual ratio of loans-to-GDP stands at 42%, starting from a negligible basis, during 1990s. The Albanian banking system, as well as the global financial system, felt the pinch of the global financial and economic crises, through two almost simultaneous warning events: the deposit withdrawal from the fourth quarter of 2008 till around mid-2009 and the steep increase in non-performing loans, which almost doubled in 2008. Actual data show a stabilized rate of non-performing loans, which indicate that we are now in the upper frontier of natural adjustment of credit to economy. The now days reality is putting the Albanian banking system in front of serious challenges, like: (1) the “paradox” of ever-growing external financing sources and the (2) “difficulty” to invest disposable funds efficiently, (3) effective management of banking system’s maturity phase, and (4) continuous deepening of the Albanian financial system.Conclusively, the Albanian banking system must be obviously prepared to manage and cope with macroeconomic challenges, in the frame of some-years moderate economic growth, as well as the unavoidable consolidation of banking operators, typically with M&A process, spurred by the need to improve the economic efficiency and eventual increase of competition by non-bank financial institutions.

Bad banks choking good banks: simulating balance sheet contagion

We investigate the propagation of contagion through banks’ balance sheets in a two-country model. We simulate an increase in non-performing loans in one bank, and study the effects on other banks and the macro-economy of each country. We show that credit crunches destabilize each economy in the short run and in the long run reduce potential output. We quantify this loss.

Determinants of Interest Rate Spread: Some Empirical Evidence from Kenya’s Banking Sector

This paper analyzes the role played by bank and industry-specific factors as well as macroeconomic variables in the determination of interest margins in Kenya’s banking sector. Decomposition of the spread using income and balance sheet of the banking sector as a whole and panel data analysis of 39 commercial banks yielded consistent results which highlight the significant role played by bank and industry specific factors and macroeconomic variables in interest rate spread determination. It is shown that between 7 – 10 per cent of the interest margin was attributable to operating costs. Moreover, a 1 per cent increase in operating costs translates to 0.38 per cent increase in interest margins for the sample of banks studied. In addition, a 1 per cent increase in non-performing loans leads to an upward adjustment of interest margins by 0.12 per cent. Macroeconomic factors also contribute to changes in the interest margin. A 1 per cent increase in Treasury bill rates leads to an upward adjustment of interest margins by 0.1 per cent. Likewise, a 1 per cent increase in GDP growth and exchange rate variability results in 0.05 and 0.06 per cent increase in interest spread respectively. In contrast, a 1 per cent increase in loans-liabilities ratio (reflecting degree of intermediation) results in interest margin reduction by 0.17per cent. The results therefore emphasize the need to improve banking sector efficiency, deal with non-performing loans and maintain general macroeconomic stability.

China's Non-Performing Loans: History, Current Infrastructure, and the Future of Bad Debt in China

The People’s Republic of China is the world’s second largest economy. Beginning in the 1980s, substantial economic growth combined with political and regulatory changes led to a dramatic increase in non-performing loans. By the turn of the century, 1/4 of loans held by Chinese banks were overdue. This article examines how China managed its non-performing loans, discusses bad debt in China today, and provides suggestions for how it should tailor its non-performing loan strategy as its economy continues to slow.

Bank lending procyclicality and credit quality during financial crises

This paper analyses macroeconomic and financial determinants of bad loans applying a SVAR approach to investigate whether excessive loans granted during expansionary phases can explain the more than proportional increase in non-performing loans during contractionary periods. The results indicate that the effects of a permanent shock to bad loans on the excess of credit are significant and persistent for bad loans to firms, but not for bad loans to households or in the case of Cooperative Credit Banks, who adopt more efficient lending policies.

Wpływ polityki banków komercyjnych na stabilność rynków finansowych

The aim of this article is to analyze the impact of commercial banks` policy on the financial mar- kets stability in Poland. This analysis leads to the conclusion that, despite the well-being of the Polish banking sector, lending and deposit banks policy should be conducted with caution. This is mainly due to the economic downturn and the ensuing increase in non-performing loans in bank portfolios. Moreover, the high share of foreign currency loans significantly reduces the impact of monetary policy instruments NBP on price of money in the economy, which is also worrying in the context of financial stability. The deterioration of the economic outlook and the continuing debt crisis in several European countries, poses a threat to the stability of the financial system in Poland.

New Challenges in the Management of Banking Risks

The recent financial and economic crisis has negatively affected the entire economy, especially the banking system, causing a reduction of economy growth, an increase of non-performing loans, a deterioration of financial stability indicators and an increase of inflation. From this experience have been extracted a number of lessons, but also new challenges to the monetary authorities on the management of such situations in the future. The measures taken to reduce the vulnerabilities of the banking system have led to actions at both micro and macroeconomic level, being accompanied by additional costs and new risks. The objective of this article is to emphasize the risks propagated on the banking system in the recent economic and financial crisis, the measures who have been undertaken to reduce them and the evaluation of the level in which one adequate risk management can ensure the positive development of banking activity and the stability of the economy.Into crisis context we could identify a number of destabilizing factors that have affected the performance of banks and created the instability in the entire system. As a reaction to these events, monetary authorities have acted by implementing legislative measures that have targeted the business model implemented in banks, but also the liquidity and capital level. However, to achieve the proposed goals is required the adoption of some actions on banks level, taken individually, which were materialized in the modification of investment policies, mergers, corporate governance, entry into other markets and so on. The analysis shows that the banking system is characterized by a high level of sensitivity, subjected to vulnerabilities caused by the recent international crisis and the increase of risks at his structure. The measures taken to reduce the risks were differentially according to the level of development of each country, but the compliance therewith has reduced the negative effects of the crisis and provided a better risk management to help avoid such situations in the future.

China's Housing Market: Is a Bubble About to Burst?

China has weathered the global financial turmoil in much better shape than most other countries, including the United States. However, there been concerns that banks loosened their lending standards too much as a result of a huge stimulus, among other factors. This led to excessive lending to individual home purchasers and rapidly rising housing prices that, in turn, may eventually lead to an increase in nonperforming loans at financial institutions should those prices collapse. The result, if corrective actions prove insufficient, could be a banking crisis that might require a government bailout. The crucial issue, therefore, is whether there is a housing bubble in major cities throughout the country that is about to burst. China has certainly experienced extraordinary growth in the housing market during the past decade, which has been accompanied by substantial increases in residential property prices. This report examines whether the decade of rapid growth in home prices in fact represents a housing bubble, and if so whether the authorities are able to achieve a soft landing in the housing market.

Bank Lending Procyclicality and Credit Quality During Financial Crises

This paper analyses macroeconomic and financial determinants of bad loans applying a SVAR approach to investigate whether excessive loans granted during expansionary phases can explain the more than proportional increase in non-performing loans during contractionary periods. The results indicate that the effects of a permanent shock to bad loans on the excess of credit are significant and persistent for bad loans to firms, but not for bad loans to households or in the case of Cooperative Credit Banks, who adopt more efficient lending policies.