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Non-performing loans in the euro area: are core-periphery banking markets fragmented?

Author

Listed:
  • Dimitrios Anastasiou

    (Athens University of Economics)

  • Helen Louri

    () (Athens University of Economics, Bank of Greece and Research Associate LSE EI/HO)

  • Mike G. Tsionas

    () (Athens University of Economics and Business)

Abstract

The objective of this study is to examine the causes of non-performing loans (NPLs) in the banking system of the euro area for the period 2003-2013 and distinguish between core and periphery country determinants. The increase in NPLs post crisis has put into question the robustness of many European banks and the stability of the whole sector. It still remains a serious challenge, especially in peripheral countries which are hardest hit by the financial crisis. By employing both Fully Modified OLS and Panel Cointegrated VAR we estimate that NPLs are affected by the same macroeconomic and bank-specific conditions but the responses are stronger in the periphery. Following the FMOLS estimations 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 especially with respect to unemployment, growth and taxes. Fiscal consolidation and interest rate margins are significant for the periphery while credit to GDP is significant only for the core. Quality of management and loans to deposits play an important role, while size is negatively significant only in the periphery. Most of these findings were confirmed by the panel Cointegrated VAR results. A chi-square test comparing the estimated coefficients for the core and periphery NPLs rejects the hypothesis of equality revealing another aspect of banking fragmentation in the euro area. Such findings can be helpful when designing macro-prudential as well as NPL resolution policies, which should be adjusted appropriately to the different responses between core and periphery banks.

Suggested Citation

  • Dimitrios Anastasiou & Helen Louri & Mike G. Tsionas, 2016. "Non-performing loans in the euro area: are core-periphery banking markets fragmented?," Working Papers 219, Bank of Greece.
  • Handle: RePEc:bog:wpaper:219
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    References listed on IDEAS

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    Cited by:

    1. Anastasiou, Dimitrios, 2017. "Macroeconomic Determinants of MIR Rate: Evidence from the Euro area," MPRA Paper 80972, University Library of Munich, Germany.
    2. Anastasiou, Dimitrios, 2016. "Management and Resolution methods of Non-performing loans: A Review of the Literature," MPRA Paper 77581, University Library of Munich, Germany, revised 2017.
    3. Anastasiou, Dimitrios, 2017. "The Interplay between Ex-post Credit Risk and the Cycles: Evidence from the Italian banks," MPRA Paper 79470, University Library of Munich, Germany.

    More about this item

    Keywords

    Non-performing loans; Macroeconomic determinants; Bank-specific determinants; Financial Fragmentation; FMOLS estimation; Panel Cointegrated VAR;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G2 - Financial Economics - - Financial Institutions and Services

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