Credit risk determinants in the vulnerable economies of Europe : evidence from the Spanish banking system

Purpose: The purpose of this paper is to investigate the determinants of non-performing loans in the Spanish banking system over the period 1997Q4–2015Q3. This timeframe includes not only the booming period for the Spanish economy but also an extended post-crises interval which is missing from other studies for Spain. Design/methodology/approach: Using quarterly data from the Central Bank of Spain and from the European Central Bank, the paper employs the ARDL approach to cointegration to identify the existence of a long or short-run relationship between NPLs and a set of macroeconomic, bank-related and country-specific indicators. Findings: Findings from the ARDL model indicate that macroeconomic, bank-specific variables and interest rates are important determinants of non-performing loans in the Spanish banking system. Specifically, the real GDP, the Spanish long-term government bond yield, the return on equity, the total credit granted by the Spanish banks and their capital to assets ratio, explain credit risk in Spain both in the short and the long run. Research limitations/implications: Data on the bank-specific variables are for the whole banking industry, and not for individual banks. If such data were available, a comparison of the credit risk determinants between small/ big banks, private/public or domestic/foreign could be possibly made. Originality/value: These findings provide useful evidence to bank managers and policymakers in dealing with loans’ defaults in Spain and in undertaking crucial reforms to stabilize the economy.