Macro economic determinants of credit risks in the asean banking system

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Macro economic determinants of credit risks in the asean banking system

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UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS MACROECONO MIC DETERMINANTS OF CREDIT RISK IN THE ASEAN BANKING SYSTEM BY NGUYEN CHI THANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2016 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS MACRO ECONOMIC DETERMINA NTS OF CREDIT RISK IN THE ASEAN BANKING SYSTEM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN CHI THANH Academic Supervisor: DR NGUYEN VU HONG THAI HO CHI MINH CITY, DECEMBER 2016 DECLARATION I declare that the wholly and mainly contents and the work presented in this thesis (Macro Economic Determinants of Credit risk in the ASEAN Banking System) are conducted by myself The work is based on my academic knowledge as well as my review of others’ works and resources, which is always given and mentioned in the reference lists This thesis has not been previously submitted for any degree or presented to any academic board and has not been published to any sources I am hereby responsible for this thesis, the work and the results of my own original research NGUYEN CHI THANH i ACKNOWLEDGEMENT Here I would like to show my sincere expression of gratitude to thank my supervisor, Dr Nguyen Vu Hong Thai for his dedicated guideline, understanding and supports during the making of this thesis His precious academic knowledge and ideas has motivated me for completing this thesis Besides, I would like to express my appreciation to the lecturers and staff of the Vietnam – Netherlands Program at University of Economics Ho Chi Minh city for their willingness and priceless time to assist and give me opportunity for this thesis completion Next, I would like to thank all of my classmates for their encouragement and their hard work, which become a good example for me to the thesis I wish all of us will graduate at the same date Lastly, I would like to express my love to my families for their unlimited supports which has led to the completion of this course research project ii ABBREVIATION ASEAN: Association of Southeast Asian Nations DGMM: the difference generalized method of the moments estimator FE & RE: Fixed-effect and Random-effect estimator GDP: Gross domestic product NPLs: Non-performing loans OECD: Organization for Economic Cooperation and Development OLS: Ordinary Least Square SGMM: the system generalized method of the moments estimator iii ABSTRACT The impact of credit risk, which is caused by the increase in the non-performing loans (NPLs), on the performance and stability of banking system as well as economic activities have recently raised many interests from researchers and policy makers Motivated by the close connection between the NPLs and macroeconomic environments as proposed by many researchers, this paper will empirically examine the determinants of non-performing loans in commercial banking systems of the five ASEAN countries in the period of 2002 to 2015 The research uses a sample of 162 banks in these countries with 11 variables of macroeconomic and bank-specific factors and applies the System Generalized Method of Moments estimator (SGMM) for dynamic panel models The empirical results in this paper indicate that the movement of NPLs in the commercial banks of the five studied countries is associated with both macroeconomic variables and bank-specific factors For the macroeconomic condition, an increase in unemployment rate and the appreciation of domestic currency are found to significantly increase the NPLs In addition, bank with higher returns on asset and leverage ratio and low ratio of equity to total assets will have lower rate of NPLs Moreover, with the application of additional statistical analyses, the results indicate that the findings of the main model of this paper are consistent and robust iv CONTENTS DECLARATION i ACKNOWLEDGEMENT ii ABBREVIATION .iii CONTENTS v APPENDIX LIST OF TABLES CHAPTER 1: OVERVIEW OF RESEARCH .3 Introduction: 1.1 Backgrounds: 1.2 Problem statements: .4 1.3 Research objectives: .5 1.4 Research questions: 1.5 Hypothesis of the study: 1.6 The importance of research: 1.7 Structure of Research: CHAPTER 2: LITERATURE REVIEWS .9 2.1 Theoretical reviews: 2.2 Empirical reviews: 13 2.3 Conclusion: 22 2.4 Research Hypothesis: 23 CHAPTER 3: DATA AND METHODOLOGY 27 3.1 Data collection: 27 3.2 Econometric methodology – The NPLs measurement: 28 3.3 The variables definition and measurement: .32 v 3.3.1 The dependent variable – the Non-performing loans: .32 3.3.2 Macroeconomic variables: 32 3.3.3 Microeconomic variables – bank-specific determinants: 34 3.4 Econometric strategy – The system GMM estimator: .38 CHAPTER 4: RESULTS AND DISCUSSIONs 40 4.1 Summary statistics: 40 4.2 Unit root tests: .41 4.3 Empirical results: 41 CHAPTER 5: OTHER ANALYSIS AND ROBUSTNESS CHECK 51 CHAPTER 6: CONCLUSION, POLICY IMPLICATIONS & LIMITATIONS OF THE REASEARCH 56 6.1 Main findings: .56 6.2 Policy implications: .57 6.3 Limitations: 58 6.4 Future research recommendation: .58 REFERENCES 59 APPENDIX .66 vi quality assets In addition, it is recommended that banks should limit excessive lending as well as loans denominated in foreign currency and maintain high credit and capital standards 6.3 Limitations: During the making of this paper, several of limitations are inevitable Despite the contributions of this study, the small sample size with a limit of time span appears to be the first limitation The annual data seem to be not enough for the paper to make a more accurate and precise results rather than quarterly data or monthly data With a larger sample size, it could increase the degrees of freedom so that the more comprehensive and reliable results can easily obtain more information of banks’ immediate responses to short-term monetary policy as the rapid changes in interest rate In addition, this paper does not consider the difference of country institutions, which could significant affect to the movement of the banks’ credit risk Lastly, this paper only investigates the commercial banks in general, thus some distinctive aspects of bank credit risk determinants is not particularly studied in the case of private-banks and state-owned banks 6.4 Future research recommendation: For the future research information, as mentioned above, it is much better to enlarge the sample size for a more reliable results Furthermore, it is worth to consider a research of credit risk determinants with other statistical analytical tools such as structural equation modeling or a research on potential nonlinear credit market friction impacts In addition, the future research can extend to country regulatory, institutional and legal determinants or a comparative analysis on factors of NPLs in a particular loan types (business, mortgage and consumer loans) could be interesting for a further academic works in the case of five ASEAN countries Lastly, an investigation on particular type of banks (such as private banks and stateowned banks) will give more precise results on the bank credit risk factors, thus it will help policy makers pay attentions and manage the credit risk more accurately and appropriately for each type of banks Page | 58 REFERENCES Anastasiou, D., Louri, H., Tsionas, M (2016) Determinants of non-performing loans: Evidence from Euro-area countries Finance Research Letters http://dx.doi.org/10.1016/j.frl.2016.04.008 Asian Development Bank (2015) Asian Development Outlook 2015 – Financing Asia’s Future Growth Ahmad, N., Ariff, M., (2007) Multi-country study of bank credit risk determinants International Journal in Banking and Finance, (1), 135–152 Akinlo, O & Emmanuel, M (2014) Determinants of Non-Performing Loans in Nigeria The Journal of 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AR1 and AR2 tests are the Arellano–Bond tests for first and second-order autocorrelation in firstdifferenced errors; The statistics and p-values (in square brackets) for the Sargan-test of over-identifying restrictions and Hansen-test for uncorrelation between the instruments and residuals are also reported for the AB estimations The appreciated real effective exchange rate means appreciated domestic currency APPENDIX Additional analyses and Robustness checks Variables Constant Lagged NPLs SVCR LEVER INEFF NOINTINC LOGSIZE ROA UNEMP RINT REER L.GDPG INFGDP No of obs No of groups No of instrument AR1-test AR2-test Page | 69 Sargan-test Hansen p-value Notes: All models were estimated with a constant Robust t-statistics are in parentheses Significance level at which the null hypothesis is rejected: ***, 1%; **, 5%; and *, 10% The model was estimated one-step SGMM estimator with difference lag For each regression are presented the number of observations (No Obs.) AR1 and AR2 tests are the Arellano–Bond tests for first and second-order autocorrelation in firstdifferenced errors; The statistics and p-values (in square brackets) for the Sargan-test of over-identifying restrictions and Hansen-test for are also reported for the AB estimations The appreciated real effective exchange rate means appreciated domestic currency Page | 70 ... ECONOMICS MACRO ECONOMIC DETERMINA NTS OF CREDIT RISK IN THE ASEAN BANKING SYSTEM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS... CHI MINH CITY, DECEMBER 2016 DECLARATION I declare that the wholly and mainly contents and the work presented in this thesis (Macro Economic Determinants of Credit risk in the ASEAN Banking System) ... The purpose of this empirical analysis is to examine the impact of the macroeconomic environment on the credit risk in the five studied ASEAN countries To begin, the impact of relevant macroeconomic

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