Non-performing loans and Financial Development: New Evidence

Ozili, Peterson K (2019): Non-performing loans and Financial Development: New Evidence. Forthcoming in: The Journal of Risk Finance

Abstract

This paper examine the relationship between non-performing loans (NPLs) and financial (sector) development. The study is motivated by the scant knowledge on how financial development structures impact non-performing loans across banking sectors around the world. In the pooled full country empirical analysis, we find that (i) private credit to GDP ratio is positively associated with non-performing loans, (ii) NPLs are inversely associated with bank efficiency, loan loss coverage, banking competition and banking system stability, and (iii) NPL is positively associated with foreign bank presence, banking crises and bank concentration. We also find that efficient and stable banking sectors experience higher non-performing loans. In the regional empirical analysis, NPLs are negatively associated with regulatory capital ratio and bank liquidity while the graphical analysis show that NPLs are inversely related to financial development and profitability in several regions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Non-performing loans; credit risk; financial development; banking crisis; foreign banks; financial intermediation; banking sector development; efficiency; liquidity; asset quality; bank concentration, banking stability; Sub-saharan Africa; MENA; Europe; Asia-Pacific; Latin America
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; G - Financial Economics > G1 - General Financial Markets; 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

Anastasiou, D., Louri, H, and Tsionas, M. (2016), “Determinants of non-performing loans: Evidence from Euro-area countries”, Finance Research Letters. Vol. 18, pp. 116-119.

Beck, R., Jakubik, P., & Piloiu, A. (2015), “Key determinants of non-performing loans: new evidence from a global sample”, Open Economies Review, Vol. 26 No. 3, pp. 525-550.

BIS (2017), “Resolution of non-performing loans - policy options”, FSI Insights on policy implementation, No.3, Financial Stability Institute, Bank of International Settlement, Working Paper. October, Brussels. Available at: https://www.bis.org/fsi/publ/insights3.pdf

Bolt, W., & Tieman, A. F. (2004), “Banking competition, risk and regulation”, The Scandinavian Journal of Economics, Vol. 106 No. 4, pp. 783-804.

Boudriga, A., Boulila Taktak, N., & Jellouli, S. (2009), “Banking supervision and nonperforming loans: a cross-country analysis”, Journal of Financial Economic Policy, Vol. 1 No. 4, pp. 286-318.

Boyd, J. H., & De Nicolo, G. (2005), “The theory of bank risk taking and competition revisited”, The Journal of Finance, Vol. 60, No. 3, pp. 1329-1343.

Caporale, G.M., Alessi, M., Di Colli, S and Lopez, J.S. (2015), “Loan Loss Provision: Some Empirical Evidence for Italian Banks” CESifo Working Paper Series No. 5253. March 30. Available at SSRN: https://ssrn.com/abstract=2591834

Čihák, M., Demirgüç-Kunt, A., Feyen, E., & Levine, R. (2012), “Benchmarking financial development around the world”, World Bank Policy Research, Working Paper, 6175, pp. 1-56.

Corsetti, G., Pesenti, P., & Roubini, N. (2001), “Fundamental determinants of the Asian crisis: the role of financial fragility and external imbalances.” In Regional and Global Capital Flows: Macroeconomic Causes and Consequences, NBER-EASE Vol 10 (pp. 11-41). University of Chicago Press.

Creane, S., Goyal, R., Mobarak, A. M., & Sab, R. (2004), “Evaluating financial sector development in the Middle East and North Africa: New methodology and some new results.” Topics in Middle Eastern and North African Economies, Electronic Journal Vol 6, pp. 1-28. Published by Middle East Economic Association and Loyola University Chicago. Available at: http://www.luc.edu/orgs/meea/

Demirgüç-Kunt, A., & Huizinga, H. (2000), “Financial structure and bank profitability,” World Bank Policy Research”, Working Paper, 2430. World Bank Mimeo. Available at: https://play.google.com/store/books/details?id=Zto-diRXrf0C&rdid=book-Zto-diRXrf0C&rdot=1&source=gbs_atb&pcampaignid=books_booksearch_atb

DeYoung, R., & Rice, T. (2004), “Noninterest income and financial performance at US commercial banks”, Financial Review, Vol. 39 No. 1, pp. 101-127.

ECB (2017), “Guidance to banks on non-performing loans”, Banking Supervision Division. March. Brussel. Available at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf

Espinoza, R. A., & Prasad, A. (2010), “Nonperforming loans in the GCC banking system and their macroeconomic effects”, IMF Working Papers 10/224, pp. 1-24.

Foos, D., Norden L. & Weber, M. (2010), “Loan Growth and Riskiness of Banks”, Journal of Banking and Finance, Vol. 34 No. 12, pp. 2929-2940.

Giannetti, M., & Ongena, S. (2009), “Financial integration and firm performance: Evidence from foreign bank entry in emerging markets”, Review of Finance, Vol. 13 No. 2, pp. 181-223.

Hermes, N., & Lensink, R. (2004), “Foreign bank presence, domestic bank performance and financial development”, Journal of Emerging Market Finance, Vol. 3 No. 2, pp. 207-229.

Jiménez, G., Lopez, J. A., & Saurina, J. (2013), “How does competition affect bank risk-taking?”, Journal of Financial Stability, Vol. 9 No. 2, pp. 185-195.

Karim, M. Z. A., Chan, S. G., & Hassan, S. (2010), “Bank efficiency and non-performing loans: Evidence from Malaysia and Singapore”, Prague Economic Papers, Vol 2, 118-132.

Klein, N. (2013), “Non-performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance”, IMF Working Paper, 01, 27.

Laeven, L. & Levine, R. (2009), “Bank Governance, Regulation and Risk-Taking”, Journal of Financial Economics, Vol. 93 No. 2, pp. 259-275.

Levine, R. (1997), “Financial development and economic growth: views and agenda”, Journal of Economic Literature, Vol. 35 No. 2, pp. 688-726.

Lin, X., & Zhang, Y. (2009), “Bank ownership reform and bank performance in China”, Journal of Banking & Finance, Vol 33 No.1, pp. 20-29.

Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (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, Vol. 36 No. 4, pp. 1012-1027.

Makri, V., Tsagkanos, A., & Bellas, A. (2014), “Determinants of non-performing loans: The case of Eurozone”, Panoeconomicus, Vol. 61 No. 2, pp. 193-206

Manove, M., Padilla, A. J., & Pagano, M. (2001), “Collateral versus project screening: A model of lazy banks”, Rand Journal of Economics, Vol. 32, No. 4, pp. 726-744.

Naceur, S. B., & Omran, M. (2011), “The effects of bank regulations, competition, and financial reforms on banks' performance”, Emerging markets review, Vol. 12 No.1, pp. 1-20.

Naudé, W (2009), “The financial crisis of 2008 and the developing countries”. No. 2009/01. WIDER Discussion Papers, World Institute for Development Economics (UNU-WIDER).

Nkusu, M. (2011), “Non-performing Loans and Macro-financial Vulnerabilities in Advanced Economies”, IMF WP/11/161, pp. 1-27.

Ozili, P. K. (2015), “How Bank Managers Anticipate Non-Performing Loans. Evidence from Europe, US, Asia and Africa”, Applied Finance and Accounting, Vol. 1 No. 2, pp. 73-80.

Ozili, P. K. (2017a), “Bank Profitability and Capital Regulation: Evidence from Listed and non-Listed Banks in Africa”, Journal of African Business, Vol. 18 No. 2. pp. 1-26.

Ozili, P. K. (2017b), “Bank earnings smoothing, audit quality and procyclicality in Africa. The case of loan loss provisions”, Review of Accounting and Finance, Vol. 16 No.2, pp.142-161.

Ozili, P. K. (2017c), “Bank earnings management and income smoothing using commission and fee income: A European context”, International journal of managerial finance, Vol. 13 No.4, pp. 419-439.

Ozili, P. K., and Outa, E. (2017), “Bank Loan Loss Provisions Research: A Review”, Borsa Istanbul Review, Vol 17 No. 3, pp. 144-163.

Ozili (2018), “Banking Stability Determinants in Africa”, International Journal of Managerial Finance

Ozili, P.K. & Thankom, A.G., (2018), “Income smoothing among European systemic and non-systemic banks”, The British Accounting Review. Vol 59, No 5. Available at: https://doi.org/10.1016/j.bar.2018.03.001

Skarica, B. (2014), “Determinants of Non-Performing Loans in Central and Eastern European Countries”, Financial Theory and Practice, Vol 38 No.1, pp. 37-59.

Smith, R., Staikouras, C., Wood, G., (2003), “Non-interest income and total income stability”, Working Paper No 198, Bank of England.

Tanasković, S., & Jandrić, M. (2015), “Macroeconomic and institutional determinants of non-performing loans”, Journal of Central Banking Theory and Practice, Vol 4 No. 1, pp. 47-62.

Tecles, P. L., & Tabak, B. M. (2010), “Determinants of bank efficiency: The case of Brazil”, European Journal of Operational Research, Vol. 207 No.3, pp. 1587-1598.

Van den End, J. W. (2016), “A macroprudential approach to address liquidity risk with the Loan-to-Deposit ratio”, The European Journal of Finance, Vol. 22 No. 3, pp. 237-253.