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Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states

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  • Ghosh, Amit

Abstract

The present study examines state-level banking-industry specific as well as region economic determinants of non-performing loans for all commercial banks and savings institutions across 50 US states and the District of Columbia for 1984–2013. Using both fixed effects and dynamic-GMM estimations, I find greater capitalization, liquidity risks, poor credit quality, greater cost inefficiency and banking industry size to significantly increase NPLs, while greater bank profitability lowers NPLs. Moreover, higher state real GDP and real personal income growth rates, and changes in state housing price index reduce NPLs, while inflation, state unemployment rates, and US public debt significantly increase NPLs. The findings imply that regular stress tests on banks’ loan quality that typically underpin scenarios for a rise in NPLs, should take into account the impact of ‘micro’ or state-level economic conditions on NPLs, in addition to banks’ capital and credit quality, and effective cost management in assessing banks financial health.

Suggested Citation

  • Ghosh, Amit, 2015. "Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states," Journal of Financial Stability, Elsevier, vol. 20(C), pages 93-104.
    • Handle: RePEc:eee:finsta:v:20:y:2015:i:c:p:93-104
    DOI: 10.1016/j.jfs.2015.08.004
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    More about this item

    Keywords

    Non-performing loans; Bank balance sheet; State-level economic conditions; GMM-estimations; Financial stability;
    All these keywords.

    JEL classification:

    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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