Macroeconomic determinants for non-performing loans dynamic – the case of the Czech Republic

• Název práce v češtině: Makroekonomické determinanty vývoje úvěrů v selhání v České republice
• Název v anglickém jazyce: Macroeconomic determinants for non-performing loans dynamic – the case of the Czech Republic
• Klíčová slova anglicky: banks loans quality, macrofinancial linkages, non-performing loans, Czech banking system
• Akademický rok vypsání: 2011/2012
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. Jakub Seidler, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 16.06.2012
• Datum zadání: 20.07.2012
• Datum a čas obhajoby: 26.06.2013 00:00
• Místo konání obhajoby: IES
• Datum odevzdání elektronické podoby: 13.05.2013
• Datum proběhlé obhajoby: 26.06.2013
• Oponenti: PhDr. Martin Dózsa

Předběžná náplň práce v anglickém jazyce

Topic Characteristics:
Quantity of non-performing loans is very important financial indicator in every banking system. Its percentage on a total quantity of loans is obviously associated to the banking stability and its high share is a significant predictor of possible banking failure. From this point of view it is evident why non-performing loan’s examination is so important when examining banking and financial vulnerabilities. The aim of this study is thus to analyze the mutual sensitivity of non-performing loans dynamic and macroeconomic variables in case of the Czech Republic.

Hypotheses:
The thesis will focus on several questions. First step is to determine which macroeconomic variables (such as GDP, unemployment, interest rates, public debt) influence amount and dynamic of non-performing loans the most significantly and with which lag, i.e. how long does it takes to recognize the change in non-performing loans caused by macroeconomic variables.
First hypothesis will examine whether these significant macroeconomic determinants and their effects will differ for different loan categories; non-performing consumer loans and non-performing business loans.
Next hypothesis will try to examine whether it is possible to use these macroeconomic variables to estimate the future development of a loan, i.e. into which class of non-performing loans (substandard, doubtful and loss categories) it will belongs to.
Third hypothesis is that non-performing loans display autoregressive behavior and also can have a feedback effect on macroeconomic variables examined as non-performing loans determinants.

Methodology:
The mutual links and influences of macroeconomic determinants and non-performing loans will be analyzed using an econometric Markov switching VAR model as the variables and loans are suspected from reciprocal interconnections which can be reflected with a lags also. For more this type of non-linear model allows using multiple equations that can explain behavior of examined variable in different time periods. By using different variables (amount of non-performing loans, GDP, unemployment, interest rates, public debt) their mutual influences will be estimated.
For this purpose data of variables examined for past 10 years will be used as the non-performing loans are in the Czech Republic effectively monitored and published since year 2002. Earlier data are available but they are inaccurate because of the data consolidation in economic transformation period.

Outline:
1. Introduction
2. Literature review
3. Non-performing loans in the Czech Republic
3.1. Institutional factors of the Czech banking system
3.2. Evolution of non-performing loans
4. Macroeconomic determinants of non-performing loans
5. Econometric analysis
5.1. Econometric methodology, dataset
5.2. Data analysis
5.3. Discussion of results
6. Conclusion

Core Bibliography:
BABOUČEK, I., JANČAR, M. (2005): “Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio” ČNB, WP No. 1: page 1-62.

BLOEM, A. M., GORTER, C. N. (2001): “The Treatment of Nonperforming Loans in Macroeconomic Statistics” International Monetary Fund, WP No. 01/209.

ČAPEK, A. (1995): “The bad loans and commercial banks in the Czech Republic” ČNB, WP No. 39.

KEETON, W. R., MORRIS, CH. S. (1987): “Why Do Banks’ Loan Losses Differ?” Federal Reserve Bank of Kansas City, Economic Review, May: page 3-21.

KHEMRAJ, T., PASHA, S. (2009): “The determinants of non-performing loans: an econometric case study of Guyana” Caribbean Centre for Banking and Finance.

LOUZIS, P. D., VOULDIS, T. A., METAXAS, L. V (2012): “Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios” Journal of Banking and Finance, Volume 36, Issue 4: page 1012-1027.

NKUSU, M. (2011): “Nonperforming Loans and Macro financial Vulnerabilities in Advanced Economies” International Monetary Fund, WP No. 11/161.

PESOLA, J. (2005): “Banking Fragility and Distress: An Econometric Study of Macroeconomic Determinants” Bank of Finland, Research Discussion Paper No. 13.

BOFONDI, M., ROPELE, T. (2011): “Macroeconomic Determinants of Bad Loans: Evidence from Italian Banks” Bank of Italy, Occasional Paper No. 89.