Indicative FSP

Drivers of retail credit risk in South – Eastern Europe

In the banking literature, the problem of NPLs has been revisited in several theoretical and empirical studies. Nonperforming loans (NPLs) have increased substantially in the southern and eastern Europe (SEE) region since the onset of the global financial crisis. This study presents an attempt to assess the deterioration in bank asset quality of banks, specifically Alpha Bank, by analysis the effect of macroeconomic, financial and banking factors on NPLs. We tested for the significance of these variables that condition non-performing loan ratios for Romania, Bulgaria, Cyprus, Greece, FYROM, Ukraine and Croatia using a panel dataset and a random effect model. In parallel, we used a multiple regression model for Bulgaria and Romania separately. Our empirical results show that GDP per capita growth is inversely related to non-performing loans, suggesting that an improvement in the real economy translates into lower non-performing loans while current account balance has a positive effect. Furthermore, consistent with international evidence we find for Bulgaria and Romania that the lending rate and the growth in loans impact the NPLs to Loans to Households ratio.

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