An analysis of non-performing loans, non-performing loans to loan loss reserves, and diversification effects on lending: three essays

Abstract

The thesis concentrates on credit risk associated with the traditional lending activity of commercial banks. To this end, three empirical analyses are conducted in this thesis. We begin with a study of the determinants of non-performing loans (NPL) and their impact in the Vietnamese banking sector. Following this, we inspect how the changes in NPL regulations impact upon the NPLs of commercial banks. Next, we expand our analysis and investigate whether the ratio of non-performing loans (NPL) to Loan Loss Reserves (LLR) adds valuable information to provide a signal about bank future profitability. Finally, we examine how diversification affects loan growth and whether a difference arises between the various categories of loans.

By applying various economic approaches, we demonstrate robust and consistent evidence for the following findings. Firstly, we find that NPL remain sensitive to both macroeconomic and bank-specific factors. We find strong evidence to support the significant impact of the changes in NPL regulations on NPL. Secondly, our findings also suggest that banks with lower NPLit to LLRit-1 ratios have greater future earnings. Additionally, we also ascertain that during an economic upswing, the prediction of a bank’s profit increases as a result of a decrease in the ratio between NPLit and LLRit-1. Finally, the subsequent analysis of diversification within this PhD also suggests that engaging in a geographic diversity strategy could lead to an expansion of gross loans as well as the growth of consumer and corporate loans. However, banks with a higher level of deposit diversification reduce the growth rates of their consumer loans.

The empirical results obtained in the above three analyses have numerous policy implications. The robustly positive association between NPL and key macroeconomic indicators suggests that the degree of credit risk is dependent on the management of the business cycle. Consequently, policymakers could aim to reinforce control actions. The results regarding the effect of bank-specific characteristics on problem loans suggests that regulators should consider these factors as leading indicators of future problem loans and to implement prompt corrective action. Moreover, this finding also highlights that tighter risk controls induce banks to take on less riskier loans which therefore suggests that loan restriction policies should be considered to mitigate loan losses. Next, based on robust evidence of analysis, bank supervisors can consider the ratio between loan losses and its expected value as an early warning indicator of future performance of banks. Lastly, findings from this PhD research show that traditional bank lending activity is highly responsive to a bank’s regionalization strategy and accordingly, the design of regulatory policies and strategies should consider the influences of diversification.

More information

Identifiers

ORCID for Simon Wolfe: orcid.org/0000-0001-9815-9535

Catalogue record

Export record