Advertisement

Non-performing Loans: A Review of the Literature and the International Experience

  • Konstantinos I. Nikolopoulos
  • Andreas I. Tsalas
Chapter
Part of the Palgrave Macmillan Studies in Banking and Financial Institutions book series (SBFI)

Abstract

The chapter presents a thorough overview of the determinants of non-performing loans. A major claim in the literature is that the deregulation of the banking system over the past few decades has led to both increased bank competition and credit risk. There are two main streams in the literature that examine the determinants of bad loans: the first accepts the perspective that the macroeconomic environment influences credit risk; the second adopts the viewpoint that credit risk is affected by bank-specific factors. Recent empirical evidence highlights the importance of both macroeconomic and bank-related factors but also the significance of other influences related to the broader legal and regulatory environment, in explaining the evolution of credit risk.

Keywords

Non-performing loans Credit risk Macroeconomic determinants Bank-specific determinants GDP Unemployment 

References

  1. Athanasoglou, P., Daniilidis, I., 2011. Procyclicality in the banking industry: causes, consequences, and response. Bank of Greece, Working Paper.Google Scholar
  2. Angklomkliew, S., George, J., and Packer, F. (2009). Issues and developments in loan loss provisioning: The case of Asia. BIS Quarterly Review, 69–83.Google Scholar
  3. Beck, R., Jakubik, P., Piloiu, A., 2013a. Non-Performing Loans: What Matters in Addition to the Economic Cycle? ECB Working Paper Series, 1515.Google Scholar
  4. Belaid, F., 2014a. Loan quality determinants: evaluating the contribution of bank-specific variables, macroeconomic factors and firm level information. Graduate Institute of International and Development Studies. Working Paper No 04/2014.Google Scholar
  5. Baltagi, B.H. (2001). Econometric analysis of panel data (2nd ed.), Chichester: John Wiley & Sons.Google Scholar
  6. Bernanke, B., Gertler, M., Gilchrist, S., 1998. The Financial Accelerator in a Quantitative Business Cycle Framework. NBER Working Paper No. 6455.Google Scholar
  7. Bernanke, B., Gertler M., 1989. Agency Costs, Net Worth, and Business Fluctuations. The American Economic Review 79(1), 14–31.Google Scholar
  8. Barseghyan, L., 2010. Non-performing loans, prospective bailouts, and Japan’s slowdown. Journal of Monetary Economics, 57, 873–890.CrossRefGoogle Scholar
  9. Beck, R., Jakubik, P., Piloui, A., 2013b. Non-performing Loans What Matters in Addition to the Economic Cycle? European Central Bank Working Paper Series 1515.Google Scholar
  10. Berg, Sigbjørn, Finn Førsund, and Eilev Jansen, 1992, “Malmquist Indices of Productivity Growth during the Deregulation of Norwegian Banking, 1980-89,” Scandinavian Journal of Economics 94, 211–228.CrossRefGoogle Scholar
  11. Berger, A.N., and De Young, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking & Finance, 21, 849–870.CrossRefGoogle Scholar
  12. Bikker, J.A., and Metzemakers, P., A., J. (2005). Bank provisioning behaviour and procyclicality. International Financial Markets, Institutions and Money, 15, 141–157.Google Scholar
  13. Bolt, W. and Tieman, A.F., 2004. Banking Competition, Risk, and Regulation. The Scandinavian Journal of Economics, 106: 783–804.CrossRefGoogle Scholar
  14. Borio, C., Furfine, C., Lowe, P., 2001. Procyclicality of the financial system and financial stability: issues and policy options. BIS Papers No 1.Google Scholar
  15. Boudriga, A. N., Taktak, B. and Jellouli, S. (2009a). Bank Specific, Business and Institutional Environment Determinants of Nonperforming Loans: Evidence from MENA Countries, ERF 16th Annual Conference, Cairo, 2009.Google Scholar
  16. Boudriga, A. N., Taktak, B. and Jellouli, S. (2009b). Banking supervision and nonperforming loans: A cross-country analysis. Journal of Financial Economic Policy, 1 (4), 286–318.CrossRefGoogle Scholar
  17. Bunn, P., Redwood, V., 2003. Company Accounts Based Modelling of Business Failures and the Implications for Financial Stability. Bank of England Working Paper No 210.Google Scholar
  18. Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic Modelling, 31, 672–683.CrossRefGoogle Scholar
  19. Calomiris, C., Klingebiel, D., and Laeven, L. (2004). A taxonomy of financial crisis resolution mechanisms: Cross-country experience. World Bank Policy Research Working Paper, No. 3379.Google Scholar
  20. Cavallo, M., and Majnoni, G., (2001). Do banks provision for bad loans in good times? Empirical evidence and policy implications. Policy Research Working Paper World Bank., No. 2619.Google Scholar
  21. Cingolani, M, 2013. Finance Capitalism: A Look at the European Financial Accounts. PANOECONOMICUS, 2013, 3, 249–290.CrossRefGoogle Scholar
  22. Climent-Serrano, S., Pavia, J., 2014. An analysis of loan default determinants: the Spanish case. Banks and Bank Systems 9(4).Google Scholar
  23. Cotugno, M., Stefanelli, V. and Torluccio, G. (2010). Bank intermediation models and portfolio default rates: What’s the relation? Proceedings of 23rd Australasian Finance and Banking Conf. Sydney.Google Scholar
  24. Cragg, J. G. (1983). More efficient estimation in the presence of heteroskedasticity of unknown form. Econometrica, 51 (3), 751–763.CrossRefGoogle Scholar
  25. De Bock, R., and Demyanets, Α. (2012). Bank asset quality in emerging markets: Determinants and spillovers. IMF Working Paper, no. 71.Google Scholar
  26. Desmet, K., (2000). Accounting for the Mexican banking crisis. Emerging Markets Review, 1 (2), 165–181.CrossRefGoogle Scholar
  27. Djankov, S., McLiesh, C., Shleifer, A., 2007. Private credit in 129 countries. Journal of Financial Economics, 84 (2): 299–329.CrossRefGoogle Scholar
  28. Espinoza, R., and Prasad, A. 2010. Non-performing loans in their GCC banking system and their macroeconomic effects. IMF Working Paper, Middle East and Central Asia Department, no.224.Google Scholar
  29. Fernandez de Lis, S., Martinez Pagés, J., and Saurina, J., 2000. Credit Growth, Problem Loans and Credit Risk Provisioning in Spain. Banco de Espana. Working Paper 18.Google Scholar
  30. Gonzales-Hermosillo, B., 1999, June. Developing indicators to provide early warnings of banking crises. Financ. Dev. 1999, 36–39.Google Scholar
  31. Godlewski, C.J., 2004. Bank capital and credit risk taking in emerging market economics. Journal of Banking Regulation, 6 (2): 128–145.CrossRefGoogle Scholar
  32. Glogowski, A. (2008). Macroeconomic determinants of Polish banks’ loan losses-results of a panel data study. National Bank of Poland, Working Paper no. 53.Google Scholar
  33. Gup, B.E. and Kolari, J.W. (2005). Commercial banking: The management of risk, (3rd ed.), John Wiley and Sons Ltd.Google Scholar
  34. Fofack, Hipollyte. 2005. “Non-Performing Loans in Sub-Saharan Africa: Causal Analysis and Macroeconomic Implications.” World Bank Policy Research Working Paper 3769.Google Scholar
  35. Hansen, L.P. (1982). Large sample properties of generalized method of moments estimators. Econometrica, 50 (4), 1029–1054.CrossRefGoogle Scholar
  36. Hasan, I., and Wall, L.D. (2004). Determinants of the loan loss allowance: Some crosscountry comparisons. The Financial Review, 39 (1), 129–152.CrossRefGoogle Scholar
  37. Hughes, Joseph P., and Loretta J. Mester, 1993, “A Quality and Risk-Adjusted Cost Function for Banks: Evidence on the ‘Too-Big-To-Fail’ Doctrine,” The Journal of Productivity Analysis 4, 293–315.CrossRefGoogle Scholar
  38. Jakubík, P., and Reininger, T. (2013). Determinants of nonperforming loans in Central, Eastern and Southeastern Europe. Oesterreichische Nationalbank, Focus on European Economic integration, Q3/13, 48–66.Google Scholar
  39. Jappelli, T., Pagano, M. 2002. Information sharing, lending and defaults: Cross-countries evidence. Journal of Banking & Finance, 26 (10), 2017–2045.CrossRefGoogle Scholar
  40. Jeong, S. and Jung, H., 2013. “Bank Wholesale Funding and Credit Procyclicality: Evidence from Korea. Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, 60, 615–631.Google Scholar
  41. Jimenez, G., Saurina, J., 2005. Credit cycles, credit-risk, and prudential regulation. Banco de España, January.Google Scholar
  42. Keeton, W. R., and Morris, C. S. (1987). Why do banks’ loan losses differ? Federal Reserve Bank of Kansas City, Economic Review, May, 3–21.Google Scholar
  43. Keeton, W., 1999. Does faster loan growth lead to higher loan losses? Federal Reserve Bank of Kansas City Economic Review, 2nd quarter 1999, 57–75.Google Scholar
  44. King, R.G., Plosser, C.I., 1984. Money, Credit, and Prices in a Real Business Cycle. American Economic Review 74, 363–380.Google Scholar
  45. Klein, N., 2013. Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance. IMF Working Paper, WP/13/72.Google Scholar
  46. La Porta, R., Lopez de Silanes, F., Shleifer, A. and Vishny, R., 1998. Law and Finance. Journal of Political Economy, 106 (6): 1113–1155.CrossRefGoogle Scholar
  47. Lawrence, E. C., 1995. Consumer Default and the Life Cycle Model. Journal of Money Credit and Banking. 27, 939–954.CrossRefGoogle Scholar
  48. Louzis, D., Vouldis, A., Metaxas, V., 2012. Macroeconomic and bank-specific determinants of NPLs in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking and Finance 36, 1012–1027.CrossRefGoogle Scholar
  49. Macit, F., 2012. What determines the non-performing loans ratio: evidence from Turkish commercial banks. Cent. Econ. Anal. J. Econ. 13, 33–39.Google Scholar
  50. Makri, V., 2015. What Triggers Loan Losses? An Empirical Investigation of Greek Financial Sector. SPOUDAI Journal of Economics and Business 65, 119–143.Google Scholar
  51. Makri, V., Tsagkanos, A., Bellas A., 2014. Determinants of Non-Performing Loans: The case of Eurozone. PANOECONOMICUS 2, 193–206.CrossRefGoogle Scholar
  52. Melecky, M., Podpiera, A., 2010. Macroprudential Stress-testing Practices of Central Banks in Central and Southern Eastern Europe: An Overview and Challenges Ahead. Policy Research Working Paper, World BankGoogle Scholar
  53. Michael Manove, A., Padilla, J. and Pagano, M., 2001. Collateral versus Project Screening: A Model of Lazy Banks. The RAND Journal of Economics 32, 726–744.CrossRefGoogle Scholar
  54. Messai, A., Jouini, F., 2013. Micro and macro determinants of non-performing loans. Int. J. Econ. Financ. Issues 3, 852–860.Google Scholar
  55. Milne, A, 2014. Distance to default and the financial crisis. Journal of Journal of Financial Stability 12, 26–36CrossRefGoogle Scholar
  56. Ninimaki, J.P. (2012). Hidden loan losses, moral hazard and financial crises. Journal of Financial Stability, 8 (1): 1–14.CrossRefGoogle Scholar
  57. Nkusu, M. (2011). Nonperforming loans and macrofinancial vulnerabilities in advanced economies. IMF Working Paper 11/161.Google Scholar
  58. Panopoulou, M., 2005. Technological Change and Corporate Strategy in the Greek Banking Industry, Athens: KEPEGoogle Scholar
  59. Perotti, R., (1996). Fiscal consolidation in Europe: Composition matters. American Economic Review, 86 (2):105–110.Google Scholar
  60. Pesaran, H., Schuermann, T., Treutler, M., Weiner S., 2006. Macroeconomic Dynamics and Credit Risk: A Global Perspective. Journal of Money, Credit and Banking 38(5), 1211–1261.CrossRefGoogle Scholar
  61. Pesola, J., 2005. Banking fragility and distress: An econometric study of macroeconomic determinants. Bank of Finland Papers, No13/2005.Google Scholar
  62. Rajan R., 1994. Why Bank Credit Policies Fluctuate: A Theory and Some Evidence. The Quarterly Journal of Economics 109, 399–441.CrossRefGoogle Scholar
  63. Rajan, R., Dahl, S.C., 2003. Non-performing Loans and Terms of Credit of Public Sector Banks in India: An Empirical Assesment. Reserve Bank of India. Occasional Papers 24(3).Google Scholar
  64. Rinaldi L. and Sanchis-Arellano A., 2006a. Household Debt Sustainability: What explains Household Non-performing Loans? An Empirical Analysis. ECB Working Paper.Google Scholar
  65. Quagliariello, M. (2007). Banks’ riskiness over the business cycle: A panel analysis on Italian intermediaries. Applied Financial Economics, 17, 119–138.CrossRefGoogle Scholar
  66. Reinhart, C.M., and Rogoff, K. (2010). From financial crash to debt crisis. NBER Working Paper Series, No. 15795.Google Scholar
  67. Salas, V., and Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22 (3), 203–224.CrossRefGoogle Scholar
  68. Samad, A., (2012). Credit risk determinants of bank failure: Evidence from US bank failure. International Business Research, 5 (9), 10–15.CrossRefGoogle Scholar
  69. Saunders, A. and Cornet, M.M., (2008). Financial institutions Management, A Risk Management Approach (6th edition), McGraw-Hill Irwin.Google Scholar
  70. Sinkey Jr., J. F., and Greenawalt, M. B. (1991). Loan-loss experience and risk-taking behaviour at large commercial banks. Journal of Financial Services Research, 5, 43–59.CrossRefGoogle Scholar
  71. Skarica, B., 2014. Determinants of non-performing loans in Central and Eastern European countries. Financ. Theory Prac. 38, 37–59.CrossRefGoogle Scholar
  72. Stern, G., Feldman, R., 2004. Too Big to Fail: The Hazards of Bank Bailouts. The Brookings Institution, Washington, DC.Google Scholar
  73. Zeng, S., 2012. Bank non-performing loans (NPLs): a dynamic model and analysis in China. Mod. Econ. 3, 100–110.CrossRefGoogle Scholar

Copyright information

© The Hellenic Bank Association 2017

Authors and Affiliations

  • Konstantinos I. Nikolopoulos
    • 1
  • Andreas I. Tsalas
    • 2
  1. 1.Prifysgol Bangor UniversityBangorUK
  2. 2.Department of EconomicsUniversity of PeloponneseTripoliGreece

Personalised recommendations