Impact of macroeconomic variables on non-performing loans : an empirical study of commercial banks in Malta, Italy, Spain, France and UK.

Abstract

The aim of this dissertation is to determine the impact of macroeconomic variables on the level of non-performing loans in commercial banks in Malta, Italy, Spain, France and UK, as well as to determine whether a positive or negative relationship is witnessed between the macroeconomic variables and non-performing loans. A multiple linear regression model is used for each country, covering the period from 2002 till 2014. The macroeconomic variables under study include; gross domestic product, money supply, exchange rate, interest rate and the inflation rate. Results from this study suggest that macroeconomic variables are not the only determinants of the level of non-performing loans, with the gross domestic product and money supply being the only significant variables in the case of Malta, the interest rate showing significance only in the case of Spain and the exchange rate being the only significant variable in the UK. No significant variables were obtained in the case of Italy and France. Moreover, from the findings it was witnessed that the significant variables in the case of Malta, i.e. the gross domestic product and money supply are, respectively negatively and positively related to NPLs. The interest rate in Spain and the exchange rate in the UK both resulted in being negatively related to non-performing loans. Overall it is suggested that policy makers need to give considerable attention to the determinants of non-performing loans as a worsening non-performing loan environment will not only impact banking institutions but the overall health of the financial system will be endangered.