Nonperforming Loans in Asia: Determinants and Macrofinancial Linkages

38 Pages Posted: 21 Mar 2019 Last revised: 4 Apr 2019

See all articles by Peter Rosenkranz

Peter Rosenkranz

Asian Development Bank

Junkyu Lee

Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD)

Date Written: March 14, 2019

Abstract

The recent rise of nonperforming loans (NPLs) in some Asian economies calls for close analysis of the determinants, the potential macrofinancial feedback effects, and the implications for financial stability in the region. Using a dynamic panel model, we assess the determinants of the evolution of bank-specific NPLs in Asia and find that macroeconomic conditions and bank-specific factors such as rapid credit growth and excessive bank lending—contribute to the buildup of NPLs. Further, a panel vector autoregression analysis of macrofinancial implications of NPLs in emerging Asia offers significant evidence for the feedback effects of NPLs on the real economy and financial variables. Impulse response functions demonstrate that a rising NPL ratio decreases gross domestic product growth and credit supply and increases unemployment rate. Our findings underline the importance of considering policy options to swiftly and effectively manage and respond to a buildup of NPLs. The national and regional mechanisms underlying NPL resolution are important for safeguarding financial stability in an increasingly interconnected global financial system.

Keywords: dynamic panel model, emerging Asia, financial stability, macrofinancial feedback effects, nonperforming loans, panel vector autoregression model

JEL Classification: C32, C33, E44, G21, O16

Suggested Citation

Rosenkranz, Peter and Lee, Junkyu, Nonperforming Loans in Asia: Determinants and Macrofinancial Linkages (March 14, 2019). Asian Development Bank Economics Working Paper Series No. 574 (2019). Available at SSRN: https://ssrn.com/abstract=3357289 or http://dx.doi.org/10.2139/ssrn.3357289

Peter Rosenkranz (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Junkyu Lee

Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD) ( email )

Philippines

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