Understanding Non-Performing Loans: Causes, Determinants, and Dynamics during Banking Crises

This research presents a review of existing studies concerning Non-Performing Loans (NPLs). The aim is to identify the variables that most influence the NPL ratio, that is, the proportion of NPLs to the loans total. These determinants are typically classified in the literature as: Macroeconomic variables, such as GDP growth, unemployment, inflation; and Bank-specific variables, such as Return on Asset, Return on Equity and risk preferences (leverage). This is accomplished by systematically reviewing papers that collected data across different geographic areas, as well as across different time periods, with both a theoretical and an empirical approach. Towards the end, the dynamic behaviors of NPLs will also be examined by surveying studies that delve into time-sensitive analyses of the consequences of credit distress, that is shown to impact the real economy through feedback loops. Particular emphasis will be placed on the years immediately preceding and following macroeconomic shocks, providing insights on the different impacts such events can have on diverse countries, and finally allowing to draw some concluding remarks on appropriate policy responses.