NON-PERFORMING LOANS, BANKING SYSTEM AND MACROECONOMY
DOI:
https://doi.org/10.2478/subboec-2018-0009Keywords:
SVAR, non-performing loans, impulse response function, variance decomposition, macro-banking.Abstract
The study builds on previous studies of the consequences of non-performing loans on an economy. Using a seven-by-seven matrix in the impulse response function (IRF) of the structural autoregressive model, we find a long-run impact of an impulse to non-performing loans on the banking system and the macroeconomy in Nigeria. Conversely, non-performing loans also respond to the innovation of all macro-banking variables aside from the exchange rate and the growth rate to GDP. Also, the level of non-performing loans grows in influence in relation to the changes to the exchange rate using the variance decomposition tool of Structural VAR. Hence, a prominent role is assigned to the level of NPLs in linking the friction in the credit market to the susceptibility of both the banking system and the macroeconomy. This study passes the serial correlation tests and the three tests of normality.
JEL classification: E51, G21, O47
References
Adeyemi, B. (2011) Bank failure in Nigeria: a consequence of capital inadequacy, lack of transparency and non-performing loans? Banks and Bank Systems, 6(1), 99-109.
Ahmad, N. H., Ahmad, S. N. (2004) Key factors influencing credit risk of Islamic bank: A Malaysian case. The Journal of Muamalat and Islamic Finance Research, 1(1), 65-80.
Anastasiou, D., Louri, H., Tsionas, E. G. (2016) Non-performing loans in the euro area: are core-periphery banking markets fragmented? Working Paper of Bank of Greece Eurosystem
Anderson, S., Long, C., Jansen, C., Affeldt, F., Rust, J., Seas, B. (2011) Dynamically Stress Testing Financial Systems. Paper presented at the Proceedings of the 29th International Conference of the System Dynamics Society.
Balgova, M., Nies, M., Plekhanov, A. (2016) The economic impact of reducing non-performing loans. European Bank for Reconstruction and Development Working Paper, 193.
Barseghyan, L. (2010) Non-performing loans, prospective bailouts, and Japan's slowdown. Journal of Monetary economics, 57(7), 873-890.
Bebeji, A. (2013) Consolidation and Asset Quality of Banks in Nigeria. International Journal of Business and Management Invention, 2(2), 12-20.
Berkelmans, L. (2005) Credit and monetary policy: An Australian SVAR.
Bernanke, B., Gertler, M. (1989). Agency costs, net worth, and business fluctuations. The American Economic Review, 14-31.
Bernanke, B. S. (1986) Alternative explanations of the money-income correlation. Paper presented at the Carnegie-Rochester conference series on public policy.
Bernanke, B. S., Blinder, A. S. (1988) Credit, money, and aggregate demand. American Economic Review 78, 435-439.
Bernanke, B., Gertler, M., Gilchrist, S. (1996) The financial accelerator and the flight to quality. Review of Economics and Statistics, 78(1), 1–15.
Blanchard, O. J., Watson, M. W. (1986) Are business cycles all alike? The American business cycle: Continuity and change. University of Chicago Press. (pp. 123-180)
Boudriga, A., Taktak, N. B., Jellouli, S. (2010) Bank specific, business and institutional environment determinants of banks nonperforming loans: evidence from mena countries. Paper presented at the Economic Research Forum, Working Paper, 547, 1-28.
Caprio, G., Klingebiel, D. (2002) Episodes of systemic and borderline banking crises. Managing the real and fiscal effects of banking crises, World Bank Discussion Paper, 428, 31-49.
Cecchetti, S. G., Kharroubi, E. (2015) Why does financial sector growth crowd out real economic growth? Bank of International Settlement. BIS WIP 490
Chow, G. C., Lin, A.-l. (1971) Best linear unbiased interpolation, distribution, and extrapolation of time series by related series. The review of Economics and Statistics, 372-375.
Cochran, J. P., Call, S. T. (2000) Free banking and credit creation: Implications for business cycle theory. Quarterly Journal of Austrian Economics, 3(3), 35-50.
Drees, M. B., Pazarbasioglu, C. (1998) The Nordic banking crisis: pitfalls in financial liberalization International monetary fund Occasional Paper (No. 161)
Enders, W., Hurn, S. (2007) Identifying aggregate demand and supply shocks in a small open economy. Oxford Economic Papers, 59(3), 411-429.
Erjavec, N., Cota, B., Jakšić, S. (2012) Sources of exchange rate fluctuations: Empirical evidence from Croatia. Privredna kretanja i ekonomska politika, 22(132), 27-47.
Espinoza, R. A., Prasad, A. (2010) Nonperforming loans in the GCC banking system and their macroeconomic effects. IMF Working Papers, 1-24.
Fofack, H. (2005) Nonperforming loans in Sub-Saharan Africa: causal analysis and macroeconomic implications. World Bank Policy Research Working Paper(3769).
Friedman, J. (1994) Cultural identity and global process (Vol. 31): Sage, London.
Giannini, C. (1991) Topics in structural VAR econometrics: Berlin: Springer.
Guerrieri, V., Lorenzoni, G. (2017) Credit crises, precautionary savings, and the liquidity trap. The Quarterly Journal of Economics, 132(3), 1427-1467
Gujarati, D. N. (2009) Basic econometrics: Tata McGraw-Hill Education.
Hicks, J. R. (1937) Mr. Keynes and the" classics"; a suggested interpretation. Econometrica: journal of the Econometric Society, 147-159.
IMF. (2004) Global Financial Stability Report, April 2004: Market Developments and Issues: International Monetary Fund.
Jakubik, P., Moinescu, B. (2015) Assessing optimal credit growth for an emerging banking system. Economic Systems, 39(4), 577-591.
Jiménez, G., Ongena, S., Peydró, J. L., Saurina, J. (2017) Macroprudential policy, countercyclical bank capital buffers, and credit supply: evidence from the Spanish dynamic provisioning experiments. Journal of Political Economy, 125(6), 2126-2177
Kaminsky, G. L., Reinhart, C. M. (1999) The twin crises: the causes of banking and balance-of-payments problems. American economic review, 89(3), 473-500.
Kim, S., Roubini, N. (2000) Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach. Journal of Monetary economics, 45(3), 561-586.
King, R. G., Plosser, C. I. (1984) Money, credit, and prices in a real business cycle. The American Economic Review, 74(3), 363-380
Kiyotaki, N., Moore, J. (1997) Credit cycles. Journal of political economy, 105(2), 211-248
Klein, N. (2013) Non-performing loans in CESEE: Determinants and impact on macroeconomic performance. N0. 13-72. International Monetary Fund.
Kolapo, T. F., Ayeni, R. K., Oke, M. O. (2012) Credit risk and commercial banks' performance in Nigeria: A panel model approach. Australian Journal of Business and Management Research, 2(2), 31.
Konstantakis, K. N., Michaelides, P. G., Vouldis, A. T. (2016) Non performing loans (NPLs) in a crisis economy: Long-run equilibrium analysis with a real time VEC model for Greece (2001–2015). Physica A: Statistical Mechanics and Its Applications, 451, 149-161
Kuznets, S. (1940) Schumpeter's business cycles. The American Economic Review, 30(2), 257-271
Louhichi, A., Boujelbene, Y. (2016) Credit risk, managerial behaviour and macroeconomic equilibrium within dual banking systems: interest-free vs. interest-based banking industries. Research in International Business and Finance, 38, 104-121
Lucas Jr, R. E. (1972) Expectations and the Neutrality of Money. Journal of economic theory, 4(2), 103-124.
Lucas Jr, R. E. (1975) An equilibrium model of the business cycle. Journal of political economy, 83(6), 1113-1144.
Maigua, C., Mouni, G. (2016) Influence of interest rates determinants on the performance of commercial banks in Kenya. International Journal of Academic Research in Accounting, Finance and Management Sciences, 6(2), 121-133
Marcucci, J., Quagliariello, M. (2009) Asymmetric effects of the business cycle on bank credit risk. Journal of Banking & Finance, 33(9), 1624-1635.
McLeay, M., Radia, A., Thomas, R. (2014). Money creation in the modern economy.
Mills, F. C. (1927) Introduction to" The Behavior of Prices". In The Behavior of Prices (pp. 31-36). NBER
Mises, L. V. (1971) Theory of Money and Credit. Foundation for Econornic Education: New York.
Mishkin, F. S. (2011) Monetary policy strategy: lessons from the crisis (No. w16755). National Bureau of Economic Research.
Moinescu, B.-G. (2012) Determinants of nonperforming loans in Central and Eastern European Countries: Macroeconomic indicators and credit discipline. Review of Economic and Business Studies(10), 47-58.
Ngalawa, H., Viegi, N. (2011) Dynamic effects of monetary policy shocks in Malawi. South African Journal of Economics, 79(3), 224-250.
Nkusu, M. (2011) Nonperforming loans and macrofinancial vulnerabilities in advanced economies. IMF Working Papers, 1-27.
Purnanandam, A. (2011) Originate-to-distribute model and the subprime mortgage crisis. Review of Financial Studies, 24(6), 1881-1915.
Rajan, R., Dhal, S. C. (2003) Non-performing loans and terms of credit of public sector banks in India: An empirical assessment. Occasional Papers, 24(3), 81-121
Schnabl, P. (2012) The international transmission of bank liquidity shocks: Evidence from an emerging market. The Journal of Finance, 67(3), 897-932
Schumpeter (1969) The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. London and Oxford: Oxford University Press, 1969. Translated by Redvers Opie.
Sims, C. A. (1980) Macroeconomics and reality. Econometrica: journal of the Econometric Society, 1-48.
Sims, C. A. (1986) Are forecasting models usable for policy analysis? Federal Reserve Bank of Minneapolis Quarterly Review,10(1), 2-16.
Somoye, R. (2010) The variation of risks on non-performing loans on bank performances in Nigeria. Indian Journal of Economics & Business, 9(1).
Stiglitz, J. E. (1989) Markets, market failures, and development. The American Economic Review, 79(2), 197-203.
Tang, Q., Nasiopoulos, P., Ward, R. K. (2008) Compensation of requantization and interpolation errors in MPEG-2 to H. 264 transcoding. IEEE Transactions on Circuits and Systems for Video Technology, 18(3), 314-325.
Vodová, P. (2003) Credit Risk as a Cause of Banking Crises. Paper presented at the The Paper Prepared for the 5th International Conference Aidea Giovani, Milan. July. (pp. 3-4).
Williamson, S. D. (1987) Costly monitoring, loan contracts, and equilibrium credit rationing. The Quarterly Journal of Economics, 102(1), 135-145.
Yang, L. (2003) The Asian financial crisis and non-performing loans: evidence from commercial banks in Taiwan. International Journal of Management, 20(1), 69-74.
Zeng, S. (2012) Bank non-performing loans (NPLS): A dynamic model and analysis in China. Modern Economy, 3, 100-110.
Zhang, D., Cai, J., Dickinson, D. G., Kutan, A. M. (2016) Non-performing loans, moral hazard and regulation of the Chinese commercial banking system. Journal of Banking & finance, 63, 48-60.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2018 Studia Universitatis Babeș-Bolyai Oeconomica
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
