Cointegration Analysis of Non-performing Loans and Macroeconomic Conditions

Abstract

Until the appearance of financial crisis, share of non-performing loans in bank portfolio for most of the countries were satisfactory. Since then, average asset quality has sharply decreased which caused a lot of turmoil in financial stability of countries. This chapter investigates causation of non-performing loans, from macroeconomic variables such as real GDP growth rate, inflation, and unemployment. Accordingly, we try to identify differences in this causality between selected Balkan countries. For that purpose, quarterly data about non-performing loans, GDP rate, inflation, and unemployment for Croatia, Serbia, and Bosnia and Herzegovina for the period 2006–2015 were collected. The aim of this research is establishment of causality model between non-performing loans and macroeconomic factors, as well as analysis of differences in intensity of influence between countries covered by this research. Then by applying Vector Error Correction Model examines whether there is a causality between non-performing loans and macroeconomic variables of selected Balkans’ countries in the short and long run. The same methodology was applied to all data from analyzed countries in order to provide comparison between obtained models. Cointegration analysis of non-performing loans and macroeconomic variables has been conducted through Johansen test of cointegration. Results indicate existence of at least one cointegration vector, which proves existence of causality between non-performing loans and macroeconomic factors. Results of this methodology application indicate long-term connection of these variables and causality of non-performing loans from macroeconomic factors in analyzed countries. However, results indicate differences in intensity of influence of macroeconomic factors on non-performing loans. Also, this chapter aims to, by considering these three countries as representatives of Western Balkan, bring conclusions about causation between non-performing loans and macroeconomic variables at Western Balkan level. For that purposes, panel cointegration analysis was employed. Results have shown that improvement in macroeconomic conditions cause changes in non-performing loans.