Article Preview
TopBackground
In the world economy, the role of banks is undeniable, since they are among the main and largest contributors to any economy in the world. Financial institutions and, in particular, banks are vital in any economy in terms of their ability to mobilize depositors' savings to increase capital flows in the economy resulting in determination of investments and increased productivity.
Certainly, the disappearance of banks would lead to a sudden collapse of the global economy, as they are the main intermediary between depositors and debtors making business transactions feasible. Guy (2011) states that the banking industry still forms the main basis for financial intermediation in most countries in the world. Certainly, the main reason why financial-banking institutions offer intermediation services is to allow them to maximize profits and provide added value to shareholders. At first glance, lending is of fundamentally important for this sector given that the loans that the bank offers comes from their main source of income.
Campbell (2007) pointed out that in recent decades there have been several systemic banking crises that have arisen as a result of rising depreciated assets (mostly non-performing loans) and the underlying reason for this is the inability of liquidators to cope with those assets.
The problem of non-performing loans gained more attention with the Financial Crisis of 2007-2008, which were considered the main cause of failure for most institutions in the banking system during the recession (Karim, 2010). In fact, we can talk about non-performing loans as instruments of particular importance because they can be used in determining the stability, permanence and profitability of the banking sector. This is due to the fact that non-performing loans can reduce a bank's capital resource by affecting the business's ability to grow, resulting in the bank's insolvency or liquidation.
Cihak and Brooks (2009) consider that the loan supply reacts negatively to the weakening of the power of banks in the euro zone and the readjustment of bank lending standards has a negative impact on economic activity. Consequently, a new vicious cycle of credit squeeze and economic decline is generated by the risk of the financial cycle and the extension of the economic cycle. The number of non-performing loans began to increase considerably at the end of 2007, when the problems of the US mortgage sector became apparent. In 2009, the level of non-performing loans had already increased 4-5 times and by the end of 2012 it had reached 20% in some Eastern European countries.