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Static and Dynamic Modeling of Non-Performing Loan Determinants in the Eurozone

Author

Listed:
  • Nada Milenković

    (Faculty of Economics in Subotica, University of Novi Sad, Segedinski put 9-11, 24000 Subotica, Serbia)

  • Branimir Kalaš

    (Faculty of Economics in Subotica, University of Novi Sad, Segedinski put 9-11, 24000 Subotica, Serbia)

  • Vera Mirović

    (Faculty of Economics in Subotica, University of Novi Sad, Segedinski put 9-11, 24000 Subotica, Serbia)

  • Jelena Andrašić

    (Faculty of Economics in Subotica, University of Novi Sad, Segedinski put 9-11, 24000 Subotica, Serbia)

Abstract

The issue of non-performing loans (NPLs) in a bank’s portfolio is important for a bank’s stability and sustainability. Their increased presence indicates a potential worsening of the economy and a lower quality of the bank’s assets. We estimated determinants of non-performing loans in the Eurozone for quarterly data 2015–2020. The results confirmed spatial spillover effects within Eurozone countries, which means that when a shock happens in one country in the Eurozone, it will also affect the other economies of the Eurozone area. Based on the Hausman test, a fixed-effects model was chosen as appropriate and showed that bank-specific and macroeconomic determinants significantly affect NPLs in these economies. In relation to previous studies that dealt with this issue, a co-integration analysis was introduced. A significant impact of return on assets, return on equity, and the loan-to-deposit ratio, as well as the gross domestic product, inflation, and exchange rate on NPLs in the short run and long run, was confirmed using a Pooled Mean Group (PMG) estimator. Bank management should customize credit policy based on both internal and external conditions to improve their performance, focusing on enhancing profitability and maintaining a lower loan-to-deposit ratio to reduce NPLs. The research suggests that a higher gross domestic product (GDP) growth rate is associated with fewer NPLs, while inflation uncertainty and a volatile exchange rate can increase NPLs, highlighting the importance of adjusting strategies to the macroeconomic landscape.

Suggested Citation

  • Nada Milenković & Branimir Kalaš & Vera Mirović & Jelena Andrašić, 2024. "Static and Dynamic Modeling of Non-Performing Loan Determinants in the Eurozone," Mathematics, MDPI, vol. 12(21), pages 1-21, October.
    • Handle: RePEc:gam:jmathe:v:12:y:2024:i:21:p:3323-:d:1504918
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