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According to the growing number of researchers, NPLs as an indicator of financial vulnerability finds its roots in both economy-level factors, as well as the specifics of each country’s banking system, in addition to prudential regulations, and the quality of institutions and risk management on a national and bank-specific level. The deteriorating quality of loan portfolios can be the result of the slowdown in economic activity and the following inertia in credit and bank profitability. In the aftermath of the crisis periods, Emerging Europe’s slow NPL problem resolution could overflow and cause a permanent state of stagnation and become an emerging problem at any point of crisis in the future. Studying the specific determinants and all related effects to NPLs is a valuable insight that can help understand the pitfalls and vulnerabilities of financial systems and help bring stability and growth to the economy and the financial sector by strengthening regulation and implementing new policies. This work examines the dynamics between non-performing loans and their macroeconomic and banking system-specific determinants in selected developing European countries over the period 2000Q1 to 2021Q4. The selected as variables determinants include quarterly proxies for economic growth and stability, as well as banking system size, capital adequacy, lending, profitability, and efficiency. The panel of developing countries includes Bulgaria, Czech Republic, Hungary, Poland, Romania. The methods used in examining the dynamics include static (Fixed Effects) and dynamic (GMM) panel models, and, finally, a Panel VAR model, including Granger causality tests, variance decomposition, and impulse response functions. The novelty in this paper is the focus on the feedback effect between the determinants and the levels of non-performing loans, and the inclusion of the latest crisis resulting of the COVID-19 pandemic. According to the most recent research, a panel vector autoregression (VAR) approach is used to conduct the analysis. This model enables all variables in the system to interact, which allows accounting for all potential interactions between the variables at once. The methodology also enables the analysis of how NPLs react to shocks in the respective macroeconomic environment and banking industry, as well as the feedback effect of NPLs on them.
Keywords: non-performing loans, Emerging Europe, VAR, panel data
| Title | Econometric Analysis of Non-Performing Loans in the Emerging Europe: A Panel VAR Approach |
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