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Non-Performing Loans in the Euro Area: Are Core-Periphery Banking Markets Fragmented?

49 Pages Posted: 17 Nov 2016 Last revised: 13 Jan 2017

Dimitrios Anastasiou

Athens University of Economics and Business - Department of Accounting and Finance; Athens University of Economics and Business - Department of Economics

Helen Louri

Athens University of Economics and Business - Department of Economics

Efthymios G. Tsionas

Lancaster University

Date Written: November 13, 2016

Abstract

The objective of this study is to examine the causes of non-performing loans (NPLs) in the banking system of the euro area for the period 2003-2013 and distinguish between core and periphery country determinants. The increase in NPLs post crisis has put into question the robustness of many European banks and the stability of the whole sector. It still remains a serious challenge, especially in peripheral countries which are hardest hit by the financial crisis. By employing both Fully Modified OLS and Panel Cointegrated VAR as econometric methodologies we estimate that NPLs are affected by the same macroeconomic and bank-specific conditions but the responses are stronger in the periphery. Following the FMOLS estimations NPLs in the euro area have performed an upward (much higher in the periphery) shift after 2008 and are mostly related to worsening macroeconomic conditions especially with respect to unemployment, growth and taxes. Fiscal consolidation and interest rate margins are significant for the periphery while credit to GDP is significant only for the core. Quality of management and loans to deposits play an important role, while size is negatively significant only in the periphery. Most of these findings were confirmed by the panel Cointegrated VAR results. A chi-square test comparing the estimated coefficients for the core and periphery NPLs rejects the hypothesis of equality revealing another aspect of banking fragmentation in the euro area. Such findings can be helpful when designing macro-prudential as well as NPL resolution policies, which should be adjusted appropriately to the different responses between core and periphery banks.

Keywords: Non-Performing Loans, Macroeconomic Determinants, Bank-Specific Determinants, Financial Fragmentation, FMOLS Estimation, Panel Cointegrated VAR

JEL Classification: C23, C51, G21, G2

Suggested Citation

Anastasiou, Dimitrios and Louri, Helen and Tsionas, Efthymios G., Non-Performing Loans in the Euro Area: Are Core-Periphery Banking Markets Fragmented? (November 13, 2016). Available at SSRN: https://ssrn.com/abstract=2868777

Dimitrios Anastasiou (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece

Eleni (Helen) Louri

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+30 1 8203122 (Phone)
+30 1 8238249 (Fax)

Efthymios G. Tsionas

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom

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