Credit Risk Determinants in the Vulnerable Economies of Europe: Evidence from the Spanish Banking System

Abstract

Purpose:The purpose of this paper is to investigate the determinants of non-performing loans in the Spanish banking system over the period 1997Q4-2015Q3. This timeframe includes not only the booming period for the Spanish economy but also an extended post-crises interval which is missing from other studies for Spain. Design/methodology/approach: Using quarterly data from the Central Bank of Spain and from the European Central Bank, the paper employs the ARDL approach to cointegration to identify the existence of a long or short-run relationship between NPLs and a set of macroeconomic, bank-related and country-specific indicators. Findings:Findings from the ARDL model indicate that macroeconomic, bank-specific variables and interest rates are important determinants of non-performing loans in the Spanish banking system. Specifically, the real GDP, the Spanish long-term government bond yield, the return on equity, the total credit granted by the Spanish banks and their capital to assets ratio, explain credit risk in Spain both in the short and the long run. Research limitations/implications:Data on the bank-specific variables are for the whole banking industry, and not for individual banks. If such data were available, a comparison of the credit risk determinants between small/ big banks, private/public or domestic/foreign could be possibly made. Originality/value: These findings provide useful evidence to bank managers and policymakers in dealing with loans' defaults in Spain and in undertaking crucial reforms to stabilize the economy.JEL Classifications C32, G17, G21

Analysing the Influence of Macroeconomic Factors on Credit Risk in the UK Banking Sector

“…Our findings suggest that unemployment and inflation are strong determinants of UK banking credit risk. This study empirically supported the findings of the existing literature on the influence of macroeconomic factors on credit risk, with a demonstration of a direct (positive) association between credit risk and inflation [17], the unemployment rate [13], and national savings [20]; an inverse (negative) relationship was established between credit risk and national debt [2], total trade deficit [29], and national income [19]. This paper significantly contributes to the empirical proof that the positive link between national savings and NPLs-that is, the "Paradox of Thrift"-is as follows: when savings rise, national wealth rises owing to a failure to spend money within the market, which slows the economy and impacts supply-demand (trade deficit), which in turn decreases GDP and enhances credit risk.…”

“…The findings of all three regression model equations reinforce the existing literature on macroeconomic factors' impact on credit risk. Conclusively, regression models demonstrate a positive link between credit risk and inflation [17], the unemployment rate [13], and national savings [20], as well as a negative link with the UK's national debt [2], total trade deficit [29], and national income [19].…”

“…The impact of trade deficit on credit risk has not received much attention [29]; thus, there is a need to examine the effects of the UK's trade deficits on NPLs.…”

Do Interest Rate Policy and Liquidity Effect on Banking Credit Risk in Indonesia?

“…Before estimating the stationarity test, the length of the lag must be determined, and a bound test must be performed. The first condition for using the ARDL method is that the data must be stationary at the level or stationary at the first difference and it is better not to suggest being stationary at the second difference only (Gourgoura & Nikolaidou, 2017).…”

Credit Risk Determinants in the Vulnerable Economies of Europe: Evidence From the Italian Banking System

“…Consistently, Nikolaidou and Vogiazas (2014) find that NPLs in the Bulgarian banking system are explained by both macroeconomic and industry-specific variables as well as by exogenous factors such as the recent global financial crisis. Gila-Gourgoura and Nikolaidou (2016), conclude that the real GDP, the Spanish long-term government bond yield, the return on equity, the total credit granted by the Spanish banks and their capital to assets ratio, explain credit risk in Spain both in the short and the long run.…”