Feedback effects of non-performing loans in EMU: A Panel VAR Approach

• Thesis title in Czech: Dopady nesplácených půjček na Eurozónu: Panel VAR analýza
• Thesis title in English: Feedback effects of non-performing loans in EMU: A Panel VAR Approach
• Academic year of topic announcement: 2020/2021
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 28.06.2021
• Date of assignment: 28.06.2021
• Date and time of defence: 15.06.2022 09:00
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 28.04.2022
• Date of proceeded defence: 15.06.2022
• Opponents: prof. Ing. et Ing. Luboš Komárek, M.Sc., MBA, Ph.D.

Guidelines

Motivation:
In the aftermath of the global financial crisis, the level of non-performing loans (NPL) started rising in the balance sheets of European banks. One of the most frequently used indicators to analyze how much banks are exposed to credit risk is the level of NPL. Therefore, the high level of NPL indicates that banks are exposed to high credit risk. Moreover, the high level of NPL delays recovery from a crisis (Aiyar et al. 2015). As the NPL and economy are related, it is crucial to know how NPL react to shocks of macroeconomic factors and vice versa – how NPL can affect the macroeconomy.

There are many studies analyzing NPL. Most of those studies focus mainly on determinants of NPL which fall into two categories: macroeconomic determinants and bank-specific determinants. Anastasiou et al. (2016a) identified the main determinants of NPL in the euro area using the generalized method of moments (GMM) approach. They identified economic growth and unemployment as important macroeconomic determinants of NPL. Klein (2013) analyzed NPL in Central, Eastern and South-Eastern Europe using the GMM approach and panel vector autoregression (VAR) approach. The author found that both bank-specific determinants and macroeconomic determinants significantly affect NPL. In addition to exploring determinants of NPL, the author examined the feedback effects of NPL. Anastasiou et al. (2016b) examined the causes of NPL in the euro area using fully modified ordinary least squares (OLS) and panel cointegrated VAR. They showed that countries on the periphery have different responses than core countries.

In my thesis, I will study mainly macroeconomic determinants of NPL in the Economic and Monetary Union (EMU) states. I will focus on the feedback effect between NPL and their macroeconomic determinants. Moreover, I will distinguish between core and periphery countries similarly to Anastasiou et al. (2016b). Many methods for analyzing NPL can be used (fixed effects, GMM, fully modified OLS). Nevertheless, I will employ a panel VAR approach that allows the analysis of feedback effects.
Hypotheses:
1. Hypothesis #1: NPL are significantly influenced by shocks in their determinants.
2. Hypothesis #2: Determinants of NPL react on NPL shock.
3. Hypothesis #3: Periphery and core countries have different responses to shocks.

References

Aiyar, S., Bergthaler, W., Garrido, J., Ilyina, A., Jobst, A., Kang, K., Kovtun, D., Liu, Y., Monaghan, D., and Moretti, M. (2015). A Strategy for Resolving Europe’s Bad Loans. IMF Staff Discussion Note 15/19 (Washington: International Monetary Fund).

Anastasiou, D., Louri, H. and Tsionas, M. (2016a). Determinants of non-performing loans: Evidence from euro-area countries. Finance Research Letters, 18, 116–119.

Anastasiou, D., Louri, H., and Tsionas, M., (2016b). Non-Performing Loans in the Euro Area: Are Core-Periphery Banking Markets Fragmented?. Bank of Greece Working Paper Series, No. 219.

Ari, A., Chen, S., and Ratnovski, L. (2019). The dynamics of non-performing loans during banking crises: a new database. IMF Working Paper 19/272.

Kjosevski, J., Petkovski, M. (2017). Non-performing loans in Baltic States: Determinants and macroeconomic effects. Baltic Journal of Economics, 17 (1), 25-44.

Klein, N. (2013). Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance. IMF Working Papers, 13 (72), 1.

Nkusu, M. (2011). Nonperforming Loans and Macrofinancial Vulnerabilities in Advanced Economies. IMF Working Paper 11/161 (Washington: International Monetary Fund).

Rruga, Alisa. (2020). Determinants of Non-Performing Loans in Eurozone and Non-Eurozone Countries. Praha, Diploma thesis. Charles University, Faculty of Social Sciences, Institute of Economic Studies. Thesis supervisor prof. PhDr. Petr Teplý Ph.D.

Us, Vuslat. (2020). A Panel VAR Approach on Analyzing Non-Performing Loans in the Turkish Banking Sector. BDDK Bankacılık ve Finansal Piyasalar Dergisi. 14. 1-38.

Preliminary scope of work

Methodology:
In order to test the hypotheses mentioned above, I plan to use the panel VAR analysis. Such method allows to examine the linkage between NPL and the real economy. Klein (2013) employed the panel VAR for evaluating the feedback effects between NPL and their determinants. Moreover, I will employ impulse responses functions (IRF).
Similarly to Anastasiou et al. (2016b), I will use several variables that were identified as macroeconomic determinants of NPL, e.g. GDP growth, unemployment, inflation. Moreover, some bank-specific variables will be also included, for example, return on equity, return on assets.

Expected Contribution:
The aim of this thesis is to explore more deeply the feedback effects of NPL on the real economy in EMU. Even though many studies analyzing the NPL have been done, those studies are mainly focusing on exploring determinants of NPL. In my thesis, I will primarily concentrate on the feedback effects between NPL and their determinants. Correspondingly to Anastasiou et al. (2016b), I will distinguish between core and periphery countries of EMU. Thus, the indication of financial fragmentation in the euro area could be revealed.