Macroeconomic and bank-specific determinants of non-performing loans: the case of baltic states
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Macroeconomic and bank‑specific determinants of non‑performing loans: the case of baltic states Jordan Kjosevski1 · Mihail Petkovski2 Accepted: 25 September 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This study examines selected macroeconomic and bank-specific determinants of non-performing loans (NPLR) for a panel of 21commercial banks from the Baltics States (Estonia, Latvia and Lithuania), using annual data for the period 2005–2016. To avoid the risk of providing unconsistent and biased results by using only one estimation technique, in our study we implemented three alternative estimation models (fixed- effects model, difference Generalized Method of Moments and system Generalized Method of Moments). Empirical results provide evidence that the most important macroeconomic factors influencing NPLR are growth of GDP, public debt, inflation and unemployment. As for the bank-specific determinants, we found that equity to total assets ratio, return on assets, return on equity and growth of gross loans have an impact on the amount of NPLR. Keywords Non-performing loans · Macroeconomic determinants · Bank-specific determinants · Baltic states · System generalized method of moments JEL Classification F61 · F62 · G01 · G21
1 Introduction Information on the banks’ loan quality is an important issue that has aroused the interest of the public as a user of banking services, the public as a potential investor in the banks’ equity, the banks’ management, the financial markets, the banking supervisors and regulators in terms of controlling the stability of the financial system and of the academic circles. This interest has intensified significantly in the last two decades. Namely, deregulation, technological change and the globalization of * Jordan Kjosevski [email protected] 1
Silk Road Bank, Pitu Guli 5, Ohrid, Republic of Macedonia
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Faculty of Economics, University Ss. Cyril and Methodius, Skopje Blvd Goce Delchev 9V 1000, Skopje, Republic of Macedonia
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Empirica
goods and financial markets, the financial crisis of the 1990s the global economic crisis of 2008–2009 and the European debt crisis of 2011–2012 have all had an impact on banks’ loan quality. One of the most common indicators used to identify the banks’ loan quality is the ratio of non-performing loans (NPLR). An increase in this ratio may signal a deterioration in banking sector results (Mörttinen et al. 2005). Experience shows that a rapid build‐up of NPLR has a crucial role in banking crises (Demirguc-Kunt and Detragiache 1998; Gonzalez‐Hermosillo 1999). This experience was confirmed during the last few years, that is, since the onset of the global financial crisis in 2007–2008, when the levels of NPLR have significantly increased across countries. However, although after 2007–2008 almost all countries in the world were faced with rapid growth of NPLR, the growth varied significantly among the different groups of countries, and among countries in the same group. For example, acco
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