Empirical Panel Analysis of Non-Performing Loans in the Czech Republic. What are their Determinants and How Strong is Their Impact on the Real Economy?

• Published in: Finance a úvěr 2018-01, Vol.68 (5), p.460-490
• Main Authors: Petkovski, Mihail, Kjosevski, Jordan, Jovanovski, Kiril
• Format: Article
• Language: English
• Subjects: Banking industry; Banks; Business cycles; Econometrics; Economic conditions; Economic crisis; Economic growth; Economic indicators; Economic models; Economic statistics; Equity; Financial services; GDP; Global economy; Gross Domestic Product; International finance; Loans; Macroeconomics; Nonperforming loans; Quality; Recessions; Securities markets; Studies; Transition economies; Unemployment
• ISSN: 0015-1920; 2464-7683

This paper examines the link between determinants of non-performing loans (NPLs)and their macroeconomic impact in the Czech Republic, using two complementary approaches. First, we explore macroeconomic and bank-specific determinants of NPLs for a panel of 22 banks from the Czech Republic, using annual data for the period 2005-2016.For our analysis, we apply difference Generalised Method of Moments. Empirical results provide evidence that the most important macroeconomic factors influencing NPLs are GDP growth, inflation, and unemployment. As for the bank-specific determinants, we found that return on assets, return on equity growth of gross loans, and equity to total assets ratio, size of the banks and foreign ownership have an impact on the amount of NPLs. Second, we investigate the feedback between NPLs and its macroeconomic determinants. The results suggest that the real economy responds to NPLs, and the analysis also indicates that there are strong feedback effects from macroeconomic conditions, such as domestic credit to private sector, GDP growth, unemployment, and inflation, to NPLs.