Nonperforming loans in the euro area: Are core–periphery banking markets fragmented?

The objectives of this study are, first, to examine the causes of nonperforming loans (NPLs) in the euro area for the period 2003Q1 to 2016Q1 and, second, to investigate if there is fragmentation between core and periphery banking markets. By employing both fully modified ordinary least squares (FMOLS) and Bayesian panel‐cointegration vector autoregression techniques, we estimate the long‐run effects of both bank‐specific and macroeconomic factors on NPLs. We find that NPLs in the euro area have performed an upward (much higher in the periphery) shift after 2008 and are mostly related to worsening macroeconomic conditions. A chi‐square test comparing the estimated coefficients for the core and periphery NPLs rejects the hypothesis of equality revealing another aspect of financial fragmentation in the euro area that leaves the periphery more vulnerable. Such findings can be helpful when designing macroprudential as well as NPL resolution policies.