How Bank Managers Anticipate Non-Performing Loans. Evidence from Europe, US, Asia and Africa

Ozili, PK (2015): How Bank Managers Anticipate Non-Performing Loans. Evidence from Europe, US, Asia and Africa. Forthcoming in: Applied Finance and Accounting , Vol. 2, No. 4 (2015)

Abstract

This study extends the literature on the determinants of NPL. I investigate whether banks anticipate non-performing loans by making balance sheet adjustments. This study draws insights into the actions taken by credit risk management teams and bank managers to minimize the size of non-performing loans. After examining 82 banks from US, Europe, Asia and Africa, the result indicate that banks adjust the level of loan loss reserves and loan growth to minimize the size of NPLs. Our results do not show evidence that loan diversification minimizes NPLs. Further, I find that banks in developing countries reduce loan growth when they expect high NPL while banks in developed countries do not anticipate the level of NPL by adjusting loan growth. Further, I find that post-crisis Basel regulation did not lead to a decrease in the size of NPLs among banks in developed countries but appear to minimize NPLs in some developing countries. Overall, the significance and predictive power of each bank-specific factor (excluding loan diversification), regulatory variable and macroeconomic indicator in explaining NPLs depends on regional factors (less significantly) and country-specific factors (more significantly).

• Item Type: MPRA Paper
• Language: English
• Keywords: Non-performing Loans, Credit risk, Macroeconomic determinants, bank specific determinants, banking
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation

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Ozili, P.K. (2015). Credit Smoothing and Determinants of Loan Loss Reserves. Evidence from Europe, US, Asia and Africa. Journal of Business, Economics and Finance, 4 (2) June, Forthcoming