What Drives Non-Performing Loans? Evidence from Emerging and Advanced Economies during Pre- and Post-Global Financial Crisis

ABSTRACT

We examine the determinants of non-performing loans (NPLs) in emerging countries compared to advanced countries during pre- and post-global financial crisis using dynamic panel estimation techniques. We analyze the effects of banking sector-specific factors and macroeconomic factors on NPLs utilizing a panel data set of emerging and advanced countries. Our results suggest that real GDP growth is the main determinant that affects the NPL ratio, and NPLs exhibit high persistence in emerging and advanced economies both for the pre- and post-crisis periods. We find that exchange rate and foreign direct investments (FDI) become statistically significant for emerging countries after the crisis period.

KEY WORDS:

• dynamic panel data
• emerging markets
• foreign direct investments
• global financial crisis
• non-performing loans

JEL CLASSIFICATION:

• F30
• G01
• G21

Acknowledgments

We are thankful to Professor Ali Kutan (editor) and anonymous referees for providing useful comments and suggestions to improve the quality of this article. The authors contributed equally to this study.

Notes

1. In this study, we classify the countries as emerging or advanced economies in accordance with the definitions of IMF’s World Economic Outlook Database. We define “emerging countries” for the emerging market and developing economies, and we define “advanced countries” for advanced economies as classified by the IMF.