The Correlation of Non-Performing Loans Between the Four Greek Systemic Banks Before and During the Recent Crisis Based on Accounting Information

The Correlation of Non-Performing Loans Between the Four Greek Systemic Banks Before and During the Recent Crisis Based on Accounting Information

Kanellos Stylianou Toudas (National and Kapodistrian University of Athens, Athens, Greece), Apostolos Christopoulos (National and Kapodistrian University of Athens, Athens, Greece), Petros Kalantonis (Technological Educational Institute of Piraeus, Aigaleo, Greece) and Stylianos Kravaritis (Hellenic Open University, Patras, Greece)
Copyright: © 2017 |Pages: 18
DOI: 10.4018/IJCFA.2017070102
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Abstract

In the last years, and especially during the recent financial crisis there is an ongoing debate about non-perorming loans (NPLs) as they have increased enormously, even in developed countries. This phenomenon has deteriorated the overall status of banks, especially in countries that affected more by the crisis, as the loan portfolio constitutes a very important part of banks' total assets. This situation has increased uncertainty towards the global banking system resulting to run on banks with negative effects on the liquidation of the financial system and therefore to the finaning of the real economy. The aim of this article is to examine the level of correlation of NPLs among the four systemic banks in Greece. The empirical results show that the level of NPLs of the examined banks is affected by the performance of the bank itself in previous periods, as well as the performance of the other three banks for the same periods. Furthermore, the impulse response of a positive shock on the level of NPLs of each bank proves the existance of correlation between the four banks.
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Literature Review

Garrido et al. (2016) examine the NPLs problem of the Italian banking system and argue that in order to control NPLs in Italy, the authorities have implemented several reforms, aiming to strengthen the corporate governance of the Italian banks, cleaning up their balance sheets and enabling their consolidation. They maintain that in order to solve this problem a comprehensive approach is needed, together with economic, supervisory, and legal measures.

Furthermore, Anastasiou et al. (2016), examine the causes of NPLs in the euro area for the decade 2003-2013. The find that the increase of NPLs during the crisis period has put in danger many European banks, especially in peripheral countries. They employ a Fully Modified OLS and a Panel Cointegrated VAR and they find that although NPLs are affected by the same macroeconomic and banking conditions, the effects are stronger in the periphery and they also find that management and loans to deposits have an important role.

According to Makri et al. (2014), over the past two decades, and especially after the early 2000s, there has been a significant increase in credit expansion. The main reason for this phenomenon was the low interest rates for borrowing, but also because of market leberalisation and technological developments, which led to an increasing inter-bank competition. They also identify the factors that affect the NPLs in the Eurozone for the period 2000-2008. They examine macro-variables like growth of GDP, public debt and unemployment and micro-variables like loans to deposits ratio, ROA and ROE. They find strong correlations between NPL and the applied macroeconomic variables and bank variables like CAR, rate of NPLs in previous year and ROE. However, interest conclusions for debt come by Cingolani (2013), who examines Alain Parguez’ 2010 criterion for debt sustainability in a monetary economy which states that public debt must be in line with private debt to avoid financial imbalances. Cingolani considers that one of the causes for the current crisis has been the excessive private debt based on Parguez's principle for stability which implies that to get out of the recent crisis public debt must be expanded to generate real wealth and revenues.

In the same year, Klein (2013) investigates NPLs in Central, Eastern and SouthEastern Europe for the period 1998–2011 and finds that the level of NPLs can be related to macroeconomic and banking conditions. The NPLs of this geographic area were responding to the macroeconomic variables of GDP growth, unemployment, and inflation but another important conclusion of this study was that increase of NPLs affect negatively the economic recovery.

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