Investigating the influence of the shadow economy on non-performing loans in European economies : a panel GMM analysis

In this paper, we use panel data containing all EU27 countries from the 2010 to 2022 period to investigate the impact exhibited by the shadow economy on the level of NPLs. Based on a Panel GMM approach we reveal a negative connection, indicating that Countries with larger informal sectors often exhibit lower reported NPLs, possibly due to less stringent oversight. Additionally, economic growth correlates negatively with NPLs, while rising unemployment is associated with increased NPL levels. However, factors like inflation, political stability, and government debt did not show significant correlations with NPLs in our analysis. The topic holds significant relevance for both macro-stability policymakers and commercial banks aiming to understand how changes in fiscal and budgetary conditions impact the quality of credit portfolios.