The Banking Sector and Macroeconomic Performance in Central European Economies

We present empirical evidence on the macroeconomic variables affecting non-performing loan (NPL) ratios in five central European economies (CEEs). We reach four main conclusions. First, a slowdown in economic activity can be expected to deteriorate the NPL ratios in the CEEs. Second, in four out of the five countries, foreign direct investment growth appears to improve NPL ratios. Third, an increase in real interest rates has a negative impact on the financial position of borrowers and loan portfolio quality in all the five CEEs. Fourth, in a majority of CEEs, increasing credit to the private sector increases the NPL ratio, indicating a need to strengthen the supervision of banks’ lending activities.