Determinants of Non-Performing Loans in Europe: An Econometric Analysis

Abstract

This thesis aims at determining which factors influenced the steep increase in non-performing loans in Europe. The variables used are comprised of both macroeconomic and bank-specific factors, in order to determine whether the rise of non-performing loans in Europe was solely due to the deteriorating macroeconomic situation during the years after the 2008 financial crisis or also due to the fragile situation of the European banking sector. The first part of the thesis covers the current NPL situation in the EU, including the current and future strategies employed to reduce the level of NPLs, as well as the legal framework and supervisory policies. The second part of the thesis identifies four macroeconomic (GDP growth, unemployment, inflation, and interest rates) and three bank-specific (return on equity, return on assets, and capital to assets ratio) factors that might have caused the steep rise in NPLs in the EU. The paper employs the use of yearly data, starting from 1998 until 2016, among 11 European countries which struggled, or are still struggling, with high non-performing loans ratios. The thesis involves both static and dynamic models, the former including fixed effects and pooled OLS models, while the latter uses and ARDL model based on a dynamic fixed effects (DFE) estimator. The findings point out that some macroeconomic variables, namely GDP growth and inflation, had an impact on the rise in NPLs.