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Topics: Macroeconomics, Economics, Inflation Pages: 34 (9769 words) Published: June 13, 2013
WP/13/72

Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance Nir Klein

© 2013 International Monetary Fund

WP/13/72

IMF Working Paper European Department Non-Performing Loans in CESEE: Determinants and Macroeconomic Performance Prepared by Nir Klein1 Authorized for distribution by Thanos Arvanitis March 2013 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Abstract The paper investigates the non-performing loans (NPLs) in Central, Eastern and SouthEastern Europe (CESEE) in the period of 1998–2011. The paper finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors, though the latter set of factors was found to have a relatively low explanatory power. The examination of the feedback effects broadly confirms the strong macro-financial linkages in the region. While NPLs were found to respond to macroeconomic conditions, such as GDP growth, unemployment, and inflation, the analysis also indicates that there are strong feedback effects from the banking system to the real economy, thus suggesting that the high NPLs that many CESEE countries currently face adversely affect the pace economic recovery. JEL Classification Numbers: E32, E44, E51, G21 Keywords: Macrofinancial linkages, non-performing loans, credit growth, feedback effects. Author’s E-Mail Address: nklein@imf.org My thanks to Thanos Arvanitis, Christoph Klingen, Amit Friedman, Alexander Tieman, Dmitry Kovtun, Heiko Hesse, Christian Saborowski, Erik de Vrijer, Heedon Kang, and the seminar participants in the IMF’s European Department and in the National Bank of Hungary for helpful discussions and comments. I also would like to thank the Austrian Central Bank (OeNB) and the Bulgarian National Bank for providing useful suggestions. All remaining errors are mine. 1

2 Contents Page

Abstract ......................................................................................................................................1  I. Introduction ............................................................................................................................3  II. Literature ...............................................................................................................................4  A. The Determinants of Non-Performing Loans ...........................................................4  B. Feedback Effects .......................................................................................................6  III. Data and Empirical Approach..............................................................................................7  IV. The Dynamics of Non-Performing Loans and Their Macroeconomic Effects..................13  V. Conclusions and some Policy Implications ........................................................................20  References ................................................................................................................................22  Appendix ..................................................................................................................................24  Tables 1. Coverage of Dataset as a Percent of the Banking system Total Assets .................................8  2. Summary Statistics, Bank-Level Indicators, 1998-2011 .......................................................9  3. Summary Statistics, Country-Specific and Global Indicators, 1998-2011 ............................9  4. NPLs: Macroeconomic and Bank-Level Determinants, 1998-2011 ....................................11  5. Correlation Matrix...

References: 9
A survey on NPLs definitions and reporting standards reveals that there are substantial differences among countries in the classification of NPLs (see report on NPLs by the European Banking Coordination “Vienna” Initiative (2012).
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