Determinants of Non-Performing Loans: A Panel Data Empirical Analysis for South European Countries

Abstract: The paper analyzes the determinants of non-performing loans in 19 European banks in Portugal, Italy, Greece and Spain based on quarterly data between 2006–2018. We implement a panel data model with interactive effects, which accounts for unobserved heterogeneity and cross-sectional dependence. The estimation approach we employ uses an analytical and iterative bias correction based on the work of Bai (Panel Data Models with Interactive Fixed Effects, Econometrica, 77, pp. 1229–1279, 2009). To the best of our knowledge, this is the first time such an approach is used to analyze the determinants of non-performing loans, while simultaneously accounting for cross-sectional dependence. The results indicate that the unemployment rate has a positive relationship with non-performing loans. When investigating bank-specific determinants, this paper finds some evidence suggesting that bank profitability and capitalization has a negative relationship with non-performing loans.