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Does bank supervision impact nonperforming loans : cross-country determinants using agregate data ?

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  • Boudriga, Abdelkader
  • Boulila, Neila
  • Jellouli, Sana

Abstract

The paper empirically analyses the cross-countries determinants of nonperforming loans and the potential impact of regulatory factors on credit risk exposure. We employ aggregate banking, financial, economic and legal environment data for a panel of 59 countries over the period 2002-2006. Empirical results indicate that higher capital adequacy ratio and prudent provisionning policy seem to reduce the level of problem loans. We also report a desirable impact of private ownership, foreign participation and bank concentration. Our findings do not support the view that market discipline leads to better economic outcomes and to reduce the level of problem loans. In contrast, all regulatory devices either exert a counterproductive impact on bad loans or do not significantly enhance credit risk exposure for countries with weak institutions, corrupt business environment and little democracy.Our results are interesting for regulators, bankers and investors as well. To reduce credit risk exposure, the effective way to do it is through enhancing the legal system, strengthening institutions and increasing transparency and democracy, rather than focusing only on regulatory and supervisory issues.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18068.

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Date of creation: 19 Oct 2009
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Handle: RePEc:pra:mprapa:18068

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Keywords: Banks; Nonperforming loans; Financial system stability; Banking regulation;

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Cited by:
  1. Ahlem Selma Messai & Fathi Jouini, 2013. "Micro and Macro Determinants of Non-performing Loan," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 852 - 860.
  2. Masahiro Inoguchi, 2012. "Nonperforming loans and public asset management companies in Malaysia and Thailand," Asia Pacific Economic Papers 398, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.

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