Journal of Finance and Investment Analysis

Empirical Determinants of the Non-Performing Loans in the Cypriot Banking System

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  • Abstract

    High levels of nonperforming loans (NPLs) weigh heavily on private investment and the ability of banks to meet their basic financing role in society. Using linear regression, the paper examines the factors that affect the level of credit risk of the Cypriot commercial banks as expressed by the percentage of non-performing loans. Like similar studies in the international literature, macroeconomic and institutional/microeconomic factors were utilized to construct and test an appropriate predictive model for NPLs. This empirical study spans the start of the global financial crisis in the fourth quarter of 2008 and the resulting recession of the economy in the second quarter of 2014. All macroeconomic indicators used in the creation and testing of five prediction models were found to affect NPLs significantly, with public debt as a percentage of GDP being the most significant
    factor.

    JEL classification numbers: E32, E44, E51, E52, G10, G21
    Keywords: Banks, nonperforming loans, business fluctuations, financial stability