How accounting information and macroeconomic environment determine credit risk? Evidence from Greece

In this paper, we study the determinants of credit risk in the Greek banking sector. Credit risk is related to bank asset quality and considered responsible for bank failures. In this context, we investigate how loan quality can be explained by accounting and macroeconomic factors. Aggregate loans loss provisions (LLP) are used as a proxy for measuring credit risk. Using quarterly aggregate data that span from 2001Q1 to 2012Q4, we examine a period that covers the recent financial crisis in Greece. The results of Generalized Method of Moments (GMM) estimations indicate that LLP is positively affected by unemployment, public debt, loans loss provisions of previous quarter and negatively by capital adequacy ratio. Therefore, our findings support the hypotheses that both macroeconomic environment and accounting information exert significant influence on the credit risk of Greek banking system.