FISCAL POLICY EFFECTS ON NON-PERFORMING LOAN FORMATION
Siakoulis
Vasilis
Bank of Greece
ABSTRACT
The
fiscal situation in an economy may have a significant impact on the evolution
of Non-Performing loans (NPLs). Austerity measures limit the loan servicing
capacity of households and businesses (Perotti, 1996) whereas public borrowing
accelerates markedly ahead of sovereign debt and banking crisis (Reinhart and
Rogof, 2010). We empirically approach the effects of fiscal policy on NPLs
employing a global data set for 31 countries covering a fifteen year period. We
control also for other macroeconomic factors so as to quantify effects stemming
from fiscal policy measures. We employ panel data methodologies since they
provide us the means to deal with unobserved country heterogeneity when
examining the determinants of asset quality. We also examine the one period
ahead forecasting performance of our models in line with the cross sample panel
data validating suggestions of Granger and Huang (1997). Our findings imply
that, on a global level, when accounting for variables linked to macroeconomic
performance such as GDP growth and the unemployment rate, fiscal pressure
imposed on the economy, as measured by changes in the cyclically adjusted
primary surplus, constitute important determinants of Non-Performing loan
formation. Also our specifications provide efficient out-of-sample one-step ahead
forecasts combining effectively unobserved country heterogeneity with observed
macro and fiscal determinants. Our analysis could be of great interest to
policymakers since the assessment of credit risk in the banking sector is a
crucial element of macro-prudential policy. In this framework, besides strict
macroeconomic performance metrics one should also take into account the fiscal
framework when trying to explain the key drivers behind NPL evolution.
Keywords: Non-Performing Loans; Fiscal Policy;
Panel Data
JEL Classification: C22,
C41, G01, G12, G14
Disclaimer: This Paper should not be reported as
representing the views of the Bank of Greece. The views expressed in this Paper
are those of the author and do not necessarily represent those of the Bank of
Greece.
Correspondence:
Siakoulis
Vasilis
Bank
of Greece.
Amerikis
3,
Athens.
102 50
E-mail:VSiakoulis@bankofgreece.gr