Macroeconomic, Institutional and Bank-Specific Determinants of Non-Performing Loans in Emerging Market Economies: A Dynamic Panel Regression Analysis

• Main Author: Bayar Yilmaz
• Format: Article
• Language: English
• Published: Sciendo 2019-09-01
• Series: Journal of Central Banking Theory and Practice
• Subjects: non-performing loans; macroeconomic factors; institutional factors; bank-specific factors; economic freedom; credit risk; emerging market economies; c23; e60; g21; g28; g32
• Online Access: https://doi.org/10.2478/jcbtp-2019-0026

Banking sector is important for various macroeconomic and microeconomic variables in terms of mobilization of funds, increasing savings, and providing alternative investment instruments suited to the every person by minimizing the risk of adverse selection and moral hazard, allocating funds to most productive projects, risk diversification. Therefore, sound functioning of the banking sector is critical especially for emerging and developing countries. This study explores the macroeconomic, institutional, and bank-specific factors behind nonperforming banking loans as an indicator of banking sector functioning in emerging market economies over the 2000-2013 period by employing the system GMM dynamic panel data estimator. Results of the dynamic panel regression analysis showed that economic growth, inflation, economic freedom (institutional development), return on assets and equity, regulatory capital to risk-weighted assets, and noninterest income to total income affected nonperforming loans negatively, while unemployment, public debt, credit growth, lagged values of nonperforming loans, cost to income ratio and financial crises affected nonperforming loans positively.