Non-performing loans in Baltic States: determinants and macroeconomic effects

ABSTRACT

This study analyses the linkages between macroeconomic and bank-specific determinants of non-performing loans (NPLs) and their impact on macroeconomic performance in the Baltic States using two complementary approaches. First, we examine the macroeconomic and bank-specific determinants of NPLs for a panel of 27 banks from the Baltics using annual data for the period 2005–2014. The most important macroeconomic factors are GDP growth, inflation and domestic credit to the private sector. As for the bank-specific determinants, we found that the equity to total assets ratio, return on assets, the return on equity and the growth of gross loans were of importance. Second, we investigate the feedback between NPLs and its macroeconomic determinants. The results suggest that the real economy responds to NPLs and that there are strong feedback effects from macroeconomic conditions such as domestic credit to private sector, GDP growth, unemployment and inflation to NPLs.

KEYWORDS:

• Non-performing loans
• macroeconomic determinants
• bank-specific determinants
• Baltic States
• GMM difference
• panel vector autoregressive model

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Kjosevski Jordan, Ph.D, is an independent researcher from the Republic of Macedonia. He was part of the Faculty of Tourism and Hospitality in Ohrid during 2000–2004. He has completed his Master’s degree in 2008 and subsequently earned his doctoral degree in 2010, from the Faculty of Economics – Skopje, Macedonia. His contributions to scientific work include: one book, 25 articles, discussions and research studies in professional and scientific magazines in Bulgaria (http://data.worldbank.org/country/czech-republic).

Petkovski Mihail, Ph.D, has earned his B.A. degree in Economics, his M.A. in Economics and his Ph.D (May 1989) in Economics from the Faculty of Economics at the Sts. Cyril and Methodius University in Skopje, Macedonia. His research focuses on financial markets and institutions, international finance and macroeconomics. He is currently chief of the department of Financial Management.

Notes

1. Results are available from authors upon request.