Non-Performing Loans (ΝPLs) in a Crisis Economy: Long-Run Equilibrium Analysis with a Real-Time VEC Model for Greece (2001-2015)

Konstantakis, Konstantinos N. and Michaelides, Panayotis G. and Vouldis, Angelos T. (2016): Non-Performing Loans (ΝPLs) in a Crisis Economy: Long-Run Equilibrium Analysis with a Real-Time VEC Model for Greece (2001-2015). Published in: Physica A: Statistical Mechanics and its Applications , Vol. C, No. 451 (2016): pp. 149-161.

Abstract

Αs a result of domestic and international factors, the Greek economy faced a severe crisis which is directly comparable only to the Great Recession. In this context, a prominent victim of this situation was the country‟s banking system. This paper attempts to shed light on the determining factors of non-performing loans in the Greek banking sector. The analysis presents empirical evidence from the Greek economy, using aggregate data on a quarterly basis, in the time period 2001-2015, fully capturing the recent recession. In this work, we use a relevant econometric framework based on a real time Vector Autoregressive (VAR) - Vector Error Correction (VEC) model, which captures the dynamic interdependencies among the variables used. Consistent with international evidence, the empirical findings show that both macroeconomic and financial factors have a significant impact on non-performing loans in the country. Meanwhile, the deteriorating credit quality feeds back into the economy leading to a self-reinforcing negative loop.

• Item Type: MPRA Paper
• Language: English
• Keywords: VAR, VEC, NPLs, Greece, Crisis, Macro-economy, Banking sector
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Ahmed S., 2006, “An Investigation of the Relationship between Non-performing Loans,Macroeconomic Factors, and Financial Factors in context of Private Commercial Banks inBangladesh”, School of Business, Independent University,Bangladesh. Available at : http://www.sb.iub.edu.bd/internship/spring2006/0120269.pdf.

Akaike, H, 1969,“Fitting Autoregressive Models for Prediction”,Annals of the Institute of Statistical Mathematics, Vo.21, pp.243 – 247.

Alogoskoufis, G., (1995), The Two Faces of Janus: Institutions, Policy Regimes and Macroeconomic Performance in Greece, Economic Policy, Vol. 10, pp. 147-192

Baxter, Marianne, and Robert G. King, 1999, “Measuring business cycles: approximate band-pass filters for economic time series”, Review of Economics and Statistics, Vol.81, No.4, pp.575-593.

Blomstrom M., LipseyR.E., andZejan M., 1994, “What Explains Developing Countries Growth?”,NBER Working Paper, No.4132.

Bosworth, B. and Kollintzas, T. (2001), “Economic Growth in Greece: Past Performance and Future Prospects” in R. Bryant, N. Garganas and G. Tavlas (eds.), Greece‟s Economic Performance and Prospects, Athens: Bank of Greece and the Brookings Institution, pp. 189-237.

Boudriga A, Taktak N. and S. Jellouli, 2009, “Banking Supervision and NonperformingLoans: a Cross-Country Analysis”, DEFI, University of Tunis,

Montfleury, Tunisia, Journal of Financial Economic Policy, Vol. 1, No. 4, pp. 286-318. Available at: http://www.bct.gov.tn/bct/siteprod/documents/Conference_Taktak.pdf.

Brooks C.,2007, Introductory Econometrics for Finance, 7th Edition, CambridgeUniversity Papers.

Central Intelligence Agency, 2010, The World Factbook, CIA website.

Christodoulakis, N., Dimelis, S., and Kollintzas, T., (1993), Comparisons of Business Cycles in Greece and the EC: Idiosyncracies and Regularities, Centre for Economic Policy Research Discussion Paper 809

De Mello, L.R., 1999, “Foreign Direct Investment-Led Growth: Evidence from TimeSeries and Panel Data”,Oxford Economic Papers, Vol. 51, No.1, pp.133-151.

Dellas, H., Tavlas, G., 2012. The road to Ithaca: the Gold Standard, the Euro and the origins of the Greek sovereign debt crisis. Bank of Greece Working Paper 149.

DeMello,L.R.,1997,“ForeignDirectInvestmentinDevelopingCountriesandGrowth: A Selective Survey”,Journal of Development Studies, Vol.34, No.1, pp.1-34.

Dees, S., 1998, “Foreign Direct Investment in China: Determinants and Effects”, Economics of Planning, Vol.31, No.2-3, pp.175-194.

Dickey, D., A., and Fuller, W., A. 1979, “Distribution of the estimators for Autoregressive Time Series with a unit root”, Journal of the American Statistical Association, Vol.74, pp. 427-431.

Economist, 2005, The Economist Intelligence Unit's quality-of-life index (2005),

Eichengreen, B., Gibson, H., 2001, “Greek banking at the dawn of the new millennium”, in: Bryant, R., Garganas, N., Tavlas, G. (Eds.), Greece’s Economic Performance and Prospects, Bank of Greece and the Brookings Institution, Greece.

Engle, R., and Granger, C., 1987, “Cointegration and error correction representation estimation and testing”, Econometrica, Vol.55, pp.251-276. 21

Eurostat (2009), Eurostat Yearbook.

Giannitsis, T. (1993), World Market Integration: Trade Effects and Implications for Industrial and Technological Change in the Case of Greece, in Psomiades, H., and Thomadakis, S., (eds.) Greece, the New Europe and the Changing International Order. New York: Pella for the Center for Byzantine and Modern Greek Studies. Queen‟s College, City University of New York, pp. 217-256.

Giannitsis, T. (2005), Greece and the Future: Pragmatism and Illusions, Athens: Polis Publications (in Greek).

Gibson, H., Tsakalotos, E., 1992, “Economic Integration and Financial Liberalization: Prospects for Southern Europe”, MacMillan in Association with St Antony‟s College, Oxford.

Granger C.W.J., 1969, “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods”, Econometrica, Vol.37, No.3, pp.424-438.

Greenidge K. and Grosvenor T., 2010, “Forecasting Non – Performing Loans in Barbados”, Journal of Business, Finance and Economics in Emerging Economies, Vol.5, No.1, pp.80-107.

Gujarati D., 2004, Basic Econometrics, 4th Edition, New York, The McGrew-Hill Companies.

HuJin-Li, Yang Li and Yung-Ho, Chiu, 2006, “Ownership and Non-performing Loans: Evidence from Taiwan‟s Banks.” Developing Economies,Vol. 42, No.3, pp. 405–420.

International Labour Organization, 2014, “Productive Jobs for Greece”, 2014

Johansen, s. and Juselius, K., 1990, “Maximum Likelihood Estimation and Inference on Cointegration with Applications to the Demand for Money”, Oxford Bulletin of Economics and Statistics, Vol. 52, pp. 169-210.

Johansen, S., 1988, “Statistical Analysis of Cointegration Vectors”, Journal of Economic Dynamics and Control, Vol. 12, No. 2-3, pp. 231-254.

Johnston J. and Dinardo J., 1997, Econometric Methods, McGraw-Hill.

Kamberoglou, N., Liapis, E., Simigiannis, G. and Tzamourani, P., 2004. “Cost Efficiency in Greek Banking”, Working Paper Bank of Greece, 9.

Keeton W. and C. Morris, 1987, “Why Do Banks‟ Loan Losses Differ?” Federal Reserve Bank of Kansas CityEconomic Review, Vol.72, No.5, pp. 3–21. Available at: http://www.kansascityfed.org/PUBLICAT/ECONREV/econrevarchive/1987/2q87keet.pdf.

KeetonW. R., 1999, “Does faster loan growth lead to higher loan losses?,” Federal Reserve of Kansas CityEconomic Review, Vol.84, No.2, pp. 57-75.

Lawrence, E., 1995, “Default and the life cycle model”, Journal of Money, Credit and Banking, Vol. 27, pp. 939-954.

Lipsey, R.E., 2000, “The Role of Foreign Direct Investment in International CapitalFlows”, NBER Working Paper, No. 7094.

Ljung G. and Box, G.E.P., 1978, “On a Measure of Lack of Fit in Time Series Models”, Biometrika, Vol.65, pp. 297–303. Louzis D., Vouldis A. and V.

Metaxas, 2012, “Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios”,Journal of Banking & Finance, Volume 36, Issue 4, April 2012, Pages 1012–1027.

Lütkepohl H., 2006,New Introduction toMultiple Time Series Analysis, Springer-VerlagBerlinHeidelberg.

Makri V., Tsaganos A. and A. Bellas, 2011, “A cross-country study: Determinants of Non-Performing Loans in the Eurozone”, Annual International Conference on Accounting and Finance (AF 2011), Singapore 23-24 May 2011. Available at: http://www.panoeconomicus.rs/casopis/2014_2/03%20Vasiliki%20Makri,%20Athanasios%20Tsagkanos%20and%20Athanasios%20Bellas.pdf.

Michaelides, P., Papageorgiou, T. and Vouldis, A. (2013), Business Cycles and Economic Crisis in Greece (1960-2011): A Long Run Equilibrium Analysis, Economic Modeling, Vol. 31, Issue C, pp. 804-816.

Mitsopoulos, M., Pelagidis, T., 2011.Understanding the Greek Crisis. Palgrave Macmillan.

Organization for Economic Cooperation and Development (OECD), Economic Surveys: Greece Paris, 1986.

Organization for Economic Cooperation and Development (OECD), Economic Surveys: Greece Paris, 2007.

Nair-Reichert, U. and Weinhold, D., 2001, “Causality Tests for Cross –Country Panels:New Look at FDI and Economic Growth in Developing Countries”,Oxford Bulletin of Economics and Statistics, Vol.63, No.2, pp.153-171.

Panopoulou, M., 2005, “Technological Change and Corporate Strategy in the Greek Banking Industry”, Athens: KEPE.

Phillips Peter C. B. and Perron, P., 1988,“Testing for a Unit Root in Time Series Regression”, Biometrika, Vol.75, No.2, pp.335–346.

Reinhart, C., Rogoff, K., 2009. This Time is Different. Princeton University Press, Princeton.

Reisen, Helmut, and Marcelo Soto, 2001, “Which Types of Capital Inflows Foster Developing Country Growth?”,International Finance, Vol.4, No.1, pp.1-14.

Rinaldi, L., Sanchis-Arellano, A., 2006, “Household Debt Sustainability: What Explains Household Non-performing loans? An Empirical Analysis”,ECB Working Paper.

Tsakalotos, E., 1991,“Alternative Economic Strategies: The Case of Greece”, Aldershot,Avebury.

Salas V. and Saurina J., 2002, Credit Risk in Two Institutional Regimes: SpanishCommercial and Savings Banks, Journal of Financial Services Research, Volume 22, Issue 3,pp 203-224.

Sims, C. A., 1980, “Macroeconomics and Reality,” Econometrica, Vol.48, pp. 1–48.

Sinkey Joseph. F. and Greenwalt Mary B, 1991, “Loan-Loss Experience and Risk Taking Behavior at Large Commercial Banks”, Journal of Financial Services Research, Vol.5, pp.43-59.

Sorge Marco, 2004, . “Stress-testing Financial Systems: An Overview of Current Mythologies.” BIS Working Papers No. 165, December.

Stock, J., H., and Watson M., W., 2001, “Vector Auto-regressions”, Journal of Economic Perspectives, Vol.15, pp. 101-115. United Nations, 2009, Human Development Report, Overcoming barriers: Human mobility and development.

Vouldis A. (2015) Credit Market Disequilibrium in Greece (2003-2011): A Bayesian Approach.ECB Working Paper Series 1805.