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The Determinants of NPLs in Emerging Europe, 2000-2011

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  • Didar ERDINC
  • Eda ABAZI

    (American University in Bulgaria)

Abstract

The emerging Europe has been hardest hit by the surge in the non-performing loans (NPLs) in the aftermath of the global financial turbulence and the crisis-induced recession. The surge in the NPLs generated a severe banking distress, and left a legacy of a debt overhang that dramatically constrained bank lending and served as a drag on economic growth in the post-crisis period. We quantitatively study the determinants of loan losses in static and dynamic panel models with a focus on the linkages between the macro-financial vulnerabilities and a wide range of bank specific variables in 20 emerging European countries during 2000-2011. Our results indicate that the NPL dynamics have been particularly sensitive to real GDP growth, and inflation, while bank profitability as a proxy for management quality plays a significant role in constraining loan defaults. By contrast, higher lending rates may lead to adverse selection problems, and hence reduces loan quality. There is also some weak evidence that rapid credit growth as a measure of excessive risk taking in lending serves as a precursor to worsening loan portfolio quality. We observe, based on a unique data set, that banks in the region increasingly employ advanced risk management regimes (Internal Rating Based, IRB) with the potential to better monitor and evaluate loan quality and hence, rein on problem loans.

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  • Didar ERDINC & Eda ABAZI, 2014. "The Determinants of NPLs in Emerging Europe, 2000-2011," Journal of Economics and Political Economy, KSP Journals, vol. 1(2), pages 112-125, December.
    • Handle: RePEc:ksp:journ1:v:1:y:2014:i:2:p:112-125
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    Cited by:

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    2. Almir ALIHODŽIĆ & İbrahim Halil EKŞİ, 2018. "Credit growth and non-performing loans: evidence from Turkey and some Balkan countries," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 9, pages 229-249, December.
    3. Mihail Petkovski & Jordan Kjosevski & Kiril Jovanovski, 2018. "Empirical Panel Analysis of Non-performing Loans in the Czech Republic. What are their Determinants and How Strong is their Impact on the Real Economy?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(5), pages 460-490, October.
    4. Ionut – Daniel Pop, 2019. "Systemic Sustainability of European Banking Activity: A Multi-Perspective Approach," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(3), pages 49-58, July.
    5. Saom Shawleen Anita & Nishat Tasnova & Nousheen Nawar, 2022. "Are non-performing loans sensitive to macroeconomic determinants? an empirical evidence from banking sector of SAARC countries," Future Business Journal, Springer, vol. 8(1), pages 1-16, December.
    6. Pop, Ionuț Daniel & Cepoi, Cosmin Octavian & Anghel, Dan Gabriel, 2018. "Liquidity-threshold effect in non-performing loans," Finance Research Letters, Elsevier, vol. 27(C), pages 124-128.
    7. Us, Vuslat, 2017. "Dynamics of non-performing loans in the Turkish banking sector by an ownership breakdown: The impact of the global crisis," Finance Research Letters, Elsevier, vol. 20(C), pages 109-117.
    8. Imad Jabbouri & Maryem Naili, 2020. "Determinants of Nonperforming Loans in Emerging Markets: Evidence from the MENA Region," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-33, February.
    9. Changjun Zheng & Sinamenye Jean-Petit, 2023. "The Effects of the Interactions Between Agro-Production, Economic, and Financial Development on Bank Sustainability," SAGE Open, , vol. 13(2), pages 21582440231, June.
    10. Ardit Gjeçi & Matej Marinč & Vasja Rant, 2023. "Non-performing loans and bank lending behaviour," Risk Management, Palgrave Macmillan, vol. 25(1), pages 1-26, March.
    11. Kandela Ramesh, 2019. "Bad Loans of Public Sector Banks in India: A Panel Data Study," Emerging Economy Studies, International Management Institute, vol. 5(1), pages 22-30, May.
    12. Teodor Hada & Nicoleta Bărbuță-Mișu & Iulia Cristina Iuga & Dorin Wainberg, 2020. "Macroeconomic Determinants of Nonperforming Loans of Romanian Banks," Sustainability, MDPI, vol. 12(18), pages 1-19, September.
    13. Pop Ionuț-Daniel & Chicu Nicoleta & Răduțu Andrei, 2018. "Non-performing loans decision making in the Romanian banking system," Management & Marketing, Sciendo, vol. 13(1), pages 761-776, March.
    14. Burim Gashi, 2021. "Impact of Bank Specific and Macro Determinants on Non-performing Loans of Polish Banking Sector," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 129-147.
    15. ROMAN Angela & BILAN Irina, 2015. "An Empirical Analysis Of The Macroeconomic Determinants Of Non-Performing Loans In Eu28 Banking Sector," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 67(2), pages 108-127.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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