The Comparative Analysis of Credit Risk Determinants In the Banking Sector of the Baltic States

A vector error correction model is applied to empirically investigate and compare the influence of macroeconomic and real estate market variables on the level of non-performing loans in the three Baltic States. A secondary goal is to analyze the effect of constant loan portfolio growth on the level of non-performing loans in the related countries. The research indicates that the most significant reason for the growth of non-performing loans was caused by the changes in the real GDP in all the three Baltic States. The increasing influence of rapid loan portfolio growth proves the assumption that banks underestimated the changes in the macroeconomic variables during the analyzed periods, especially in Latvia. Rapid growth of the real estate market played an important role in Latvia and Lithuania, but it was not as crucial as it has been previously assumed in Estonia.