How Bank Managers Anticipate Non-Performing Loans. Evidence from Europe, US, Asia and Africa

Applied Finance and Accounting 1 (2), 73-80

9 Pages Posted: 17 Apr 2015 Last revised: 27 Oct 2016

See all articles by Peterson K Ozili

Peterson K Ozili

University of Essex - Essex Business School; Central Bank of Nigeria

Date Written: 2015

Abstract

This study extends the literature on the determinants of NPL. I investigate whether banks anticipate non-performing loans by making balance sheet adjustments. This study draws insights into the actions taken by credit risk management teams and bank managers to minimize the size of non-performing loans. After examining 82 banks from US, Europe, Asia and Africa, the result indicate that banks adjust the level of loan loss reserves and loan growth to minimize the size of NPLs. Our results do not show evidence that loan diversification minimizes NPLs. Further, I find that banks in developing countries reduce-loan growth when they expect high NPL while banks in developed countries do not anticipate the level of NPL by adjusting loan growth. Further, I find that post-crisis Basel regulation did not lead to a decrease in the size of NPLs among banks in developed countries but appear to minimize NPLs in some developing countries. Overall, the significance and predictive power of each bank-specific factor (excluding loan diversification), regulatory variable and macroeconomic indicator in explaining NPLs depends on regional factors (less significantly) and country-specific factors (more significantly).

Keywords: Non-performing Loans, Credit risk, Macroeconomic determinants, bank specific determinants, banking

JEL Classification: G20, G21, G32, G38

Suggested Citation

Ozili, Peterson Kitakogelu, How Bank Managers Anticipate Non-Performing Loans. Evidence from Europe, US, Asia and Africa (2015). Applied Finance and Accounting 1 (2), 73-80. Available at SSRN: https://ssrn.com/abstract=2595023

Peterson Kitakogelu Ozili (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Central Bank of Nigeria ( email )

Plot 33, Abubakar Tafawa Balewa Way
Central Business District, Cadastral Zone
Abuja
Nigeria

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