Bank Concentration and Non-Performing Loans in Central and Eastern European Countries

Abstract

This paper examines the effect of bank concentration on the non-performing loans (NPLs) for ten Central and Eastern European (CEE) countries. The short-run effect of bank concentration is tested with the generalised method of moments system and the instrumental variable approaches, and the long-run effect is tested with the fully modified ordinary least square (FMOLS) approach. The empirical analysis shows that the bank concentration is an insignificant factor on the NPLs, either in the short or in the long-run of the panel data set. On the other hand, individual FMOLS results reveal that the bank concentration reduces the NPLs in Estonia, Latvia, and Slovakia, and increases the NPLs in Bulgaria, Croatia, Lithuania, Poland, and Slovenia in the long-run. According to this evidence, the bank concentration does not reduce the credit risk for all of the CEE countries. Therefore, bank concentration may not affect systemic stability in the CEE countries. These findings are also robust in controlling several factors, including additional control variables. As a result, the relationship between the bank concentration and the NPLs, in regards to the CEE countries, is ambiguous.

Banking sector concentration, competition and financial stability: the case of the Baltic countries

“…However, their findings also indicate that this effect is economically small at both levels of analysis. A similar result is obtained by Cifter (2015) for Central and Eastern European Countries (CEECs), as no robust relationship is found between bank concentration and non-performing loans.…”

Bank-Specific and Macroeconomic Determinants of Non-Performing Loans of Commercial Banks in Bangladesh

“…They have proved that there is the real GDP growth rate, the unemployment rate, the lending rates and public debt have a strong association on the level of NPLs. Other researchers concentrate on the macroeconomic determinants of NPLs include Cifter et al (2015), Segoviano et al(2006 and Nkusu (2011). Viswanadham et al,(2015) find in their study that economic condition and GDP impact significantly on the level of non-performing loans.…”

“…The bank-specific factors include credit risk management (Ekanayake andAzeez, 2015, Unit, 2017), bank efficiency (Cifter, 2015), loan growth (Wang, 2007), market share (Beck, Jakubik et al, 2015), concentration of lending activities (Viswanadham and Nahid, 2015), bank"s loan supervision capacity (Viswanadham and Nahid, 2015), reckless lending (Viswanadham and Nahid, 2015), fraud and dishonest (Viswanadham and Nahid, 2015), management deficiencies (Viswanadham and Nahid, 2015), poor credit documentation (Viswanadham and Nahid, 2015), non-use of prudent credit classification and risk assessment methods (Viswanadham and Nahid, 2015) concentration of lending activities (Viswanadham and Nahid, 2015), poor supervision capacity (Viswanadham and Nahid, 2015), and NPL rate of previous year (Ekanayake and Azeez, 2015). Godlewski (2005) draw attention to the links between banks profitability and NPL.…”

Banking Concentration and Financial Stability: New Evidence from a Developing Country

“…Literature on competition and financial stability seems to be consistent with competition-fragility hypothesis (Agoraki et al, 2011;Beck et al, 2013;Cifter, 2015;Huljak, 2015;Kick and Prieto, 2015;Leroy and Lucotte, 2016). When there is perfect competition in the banking sector each bank mobilizes few customers as reflected by little sum of deposit in their till.…”

“…The "concentration-stability" hypothesis suggests that there is a positive correlation between bank concentration and stability of the financial system through profitability channel (Freixas and Rochet, 2008;Berger et al, 2009;Vives, 2010;Berger and Bouwman, 2013), diversification channel (Evrensel, 2008), efficiency channel (Fernandez et al, 2010;Cifter, 2015) and easy supervision. Chang et al (2008) used the structural matrix approach on Brazilian data between 2000 and 2005 to study the effect of bank concentration on non-performing loans.…”