Banking supervision and nonperforming loans: a cross‐country analysis

Abstract

Purpose -The purpose of this paper is to empirically analyse the cross-countries determinants of nonperforming loans (NPLs), the potential impact of supervisory devices, and institutional environment on credit risk exposure. Design/methodology/approach -The paper employs aggregate banking, financial, economic, and legal environment data for a panel of 59 countries over the period 2002-2006. It develops a comprehensive model to explain differences in the level of NPLs between countries. To assess the role of regulatory supervision on credit risk, the paper uses several interactions between institutional features and regulatory devices. Findings -The empirical results indicate that higher capital adequacy ratio (CAR) and prudent provisioning policy seems to reduce the level of problem loans. The paper also reports a desirable impact of private ownership, foreign participation, and bank concentration. However, the findings do not support the view that market discipline leads to better economic outcomes. All regulatory devices do not significantly reduce problem loans for countries with weak institutions, corrupt environment, and little democracy. Finally, the paper shows that the effective way to reduce bad loans is through strengthening the legal system and increasing transparency and democracy, rather than focusing on regulatory and supervisory issues. Practical implications -First, higher CARs results in less credit exposures. Second, international regulators should continue their efforts to enhance financial development. The results suggest that foreign participation plays an important role in reducing credit exposure of financial institutions. However, in developed countries, foreign entry led to more problem loans. Finally, to reduce credit risk exposure in countries with weak institutions, the effective way to do it is through enhancing the legal system, strengthening institutions, and increasing transparency and democracy. Originality/value -The paper contributes to the literature on banking regulation and supervision. It examines aggregated data which best reflect the level of NPL of the banks in a country as opposed to individual data included in databases that suffer from the problem of representativeness. It considers the impact of regulatory variables after controlling for bank industry factors that alter primarily problem loans. Finally, the paper examines the effectiveness of regulation through the inclusion of institutional factors.

Macroeconomic Determinants of Non-Performing Loans: An Empirical Study of Some Arab Countries

“…In a recent study, Mileris (2014) showed that economic deterioration in EU countries with imperfect economic conditions has a negative effect on the debtors' ability to repay their debts. Contrary to the most previous studies, Boudriga et al (2009) using panel data of 59 countries showed that economic conditions seem to have insignificant impact on loan defaults in developed countries. Also, Bucur and Dragomirescu (2014) did not find a significant relationship between credit risk and real GDP growth rate whereas unemployment seems to be positively related to the credit risk in Romanian banking sector over the period 2008-2013. On the other hand, macroeconomic instability would have consequences on the loan quality of banks.…”

Financial Reforms and Financial Fragility: A Panel Data Analysis

“…10 See Bankscope definitions. 11 They used dummy values as proxy of ownership structure. 12 Hu et al [29] found a positive linkage between government-owned banks and NPLs in the Taiwanese banking sector.…”

“…They suggested that high rates of NPLs are generally attributed to high interest rates and the adverse macroeconomic conditions. Moreover, other studies, for example Boudriga et al [10,11]; Berger and Boye [12]; Rinaldi and Sanchis [13]; and Ranjan and Dhal [14] also include macroeconomic determinants as an explanatory variable of NPLs.…”

“…Similarly, Boudriga et al [10,11]; Caprio and Martinez [28] reported that government ownership has a positive and significant relationship with bank fragility. 12 They also found that likelihood of a banking crisis was high in those countries where more than 50% of banks' assets were government-owned.…”

How deviations from FOMC’s monetary policy decisions from a benchmark monetary policy rule affect bank profitability: evidence from U.S. banks

“…Alternatively, a negative coefficient could signal that banks are not using efficiently their set of diversified derivatives (i.e., futures, options, and swaps) to hedge counterparty credit risks (Jones and Pé rignon, 2013). In that sense, their strategies to transfer such risks to other parties to avoid or reduce the negative impact of such risk and to accept some or all of the consequences of them turns out to be very inefficient (Boudriga et al, 2009;Afriyie and Akotey, 2012). Finally the hypothesis of Chen (2013) also receives statistical support, regarding the negative impact of FLVGR on bank's profitability.…”