Determinants of bank lending in European countries

Abstract

This study investigates the determinants of bank lending in European countries, focusing on the differences between Eurozone and non-Eurozone countries. An econometric framework is applied using country-by-country Ordinary Least Squares (OLS) regressions with quarterly data from fourteen European countries over the period 2016–2024. Robustness was ensured through various diagnostic tests for stationarity, multicollinearity, autocorrelation, and heteroskedasticity. Explanatory variables include macroeconomic factors (GDP growth, inflation rate, unemployment rate, money supply, central bank policy rate, sovereign credit risk) and bank-specific indicators (loan-to-deposit ratio (LDRs), non-performing loan (NPL) ratio, common equity tier 1 (CET1) ratio). The results suggests that inflation is the most consistent determinant of bank lending, significant in over half of the sample and generally negative, though positive in Spain and Sweden. Money supply also proved influential, at times supporting and at times constraining lending. GDP growth had mixed effects, positive in Greece, Poland, and Hungary, but unexpectedly negative in France, Denmark, and Romania. Other variables, including unemployment, the NPL ratio, CET1 ratio, and loan-to-deposit ratio, exhibited weaker and more country-specific effects. The policy rate was only significant in Denmark and Romania, and sovereign credit risk was insignificant across the sample. Non-Eurozone results showed greater statistical significance, with Eurozone lending shaped more by common macroeconomic factors and ECB policy, and non-Eurozone lending more influenced by national conditions.