DETERMINANTS OF NONPERFORMING LOANS IN CENTRAL AND EASTERN EUROPEAN COUNTRIES: MACROECONOMIC INDICATORS AND CREDIT DISCIPLINE

Anticipating the nonperforming loans dynamics on the basis of macroeconomic credit risk models is crucial for shaping adequate economic policy mix to prevent disorderly deleveraging in the banking system. The added value of this paper is twofold. First, we apply reputed conditional risk model referred to as Credit Portfolio View in a regional context to test whether different patterns of registered NPLs during 2003-2011 are driven by domestic economic performances in CEE countries. Second, we turn to dynamic panel regressions with fixed effects to determine whether there are material structural differences among CE Eeconomies in terms of reimbursing behaviour. Econometric results confirm that GDP growth is the prominent macroeconomic explanatory variable of nonperforming loans developments among CEE economies. Moreover, the larger the amplitude and standard deviation of the economic cycle are, the higher the NPL ratio jumps during recession period. Monetary conditions are also important, but to a lesser extent. Although labour market indicators do have informational content for modelling NPLs dynamics, their presence in the multivariate panel regressions is affected by existing strong dependency to economic growth variables. Furthermore, fixed effects were not found statistically relevant, suggesting that there are no major differences in terms of credit discipline across the CEE region. Under this setting, continued refraining from promoting domestic legislative initiatives that would impact the reimbursing behaviour is crucial for avoiding a major disruption in the real economy for many years.