Macroeconomic determinants of non-performing loans in Malta : an empirical study

Abstract

This dissertation examines the macroeconomic factors affecting non-performing loans (NPLs) in Malta and assesses their impact based on borrower type. NPLs pose a threat to economic stability, impact banks profitability, delay economic recovery post-recession and can have long lasting effects on banks by stunting the growth rate of performing loans. Therefore, understanding the determinants of NPLs is crucial to effective risk management strategies and better economic policy measures. A multiple linear regression model is used for the 4 NPLs types being Overall NPLs, Resident Mortgages NPLs, Resident Household NPLs and Non-Financial Corporation (NFC) NPLs. The study covers the period from 2008 till 2023. Results from this study suggest that Interest Rates (IR) and the Housing Price Index (HPI) are both negatively related to all NPLs types. Gross Domestic Product (GDP) and Maltese Government Debt (as a % of GDP) are suggested to be respectively negatively and positively related to the Overall NPLs ratio, Resident Mortgages NPLs and Resident NFC NPLs. The Inflation rate (π), Unemployment Rate (UR) and the Maltese Equity Price Index (MEPI) are suggested to be statistically insignificant when determining all types of NPLs in Malta, however MEPI is found to help explain Overall NPLs ratio to a certain degree, as it resulted as statistically significant at the 10% level. The findings suggest that macroeconomic variables are not the only determinants of NPLs, however that macroeconomic variables, namely IR, HPI, GDP and MGD help determine the level of NPLs in Malta. Other determinants may include other macroeconomic, microeconomic and industry-specific factors.