J_Bus_Account_Financ_Perspect 2021, 3(1), 8; doi:10.35995/jbafp3010008
Peer review: This article has been peer-reviewed through the journal’s standard double blind peer-review, where both the reviewers and authors are anonymised during review.
Open access: Journal of Business Accounting and Finance Perspectives is a peer-reviewed open-access journal.
2. Literature Review
3. Methodology and Results
- Unemployment rate (UR), seasonally adjusted for the years 2000 to 2019. The variable was chosen as unemployment is directly related to the ability to service liabilities.
- Nominal unit labor cost (NULC), per unit of product (percentage change over a period of three years), calculated as the ratio of wage expenditure per employee to labor productivity, which is defined as the GDP per employee. This variable is identical to the changes in the average wage in the labor market. High labor costs mean high wages and, therefore, sufficient disposable income. On the contrary, negative changes in the index lead to a decrease in income and, therefore, a reduction in the ability to service liabilities.
- The consumer price index (CPI) reflects consumer price indices, as the average time change in prices paid by households for a specific basket of consumer goods and services, based on the year 2000. This index is of interest due to its correlation with disposable income. An increase in the index implies an increase in the cost of living and, therefore, a decrease in disposable income.
- Long-term cost of borrowing (LTCB) reflects the cost of borrowing indicator for long-term loans to both households and non-financial corporations. Increased borrowing costs mean complexity in serviceability.
- The loan-to-deposit ratio (LTDR), as an indicator that shows the long-term relationship between bank liabilities and bank receivables or, in other words, the relationship between borrowers’ cash and liabilities. The ratio of deposits to loans indicates, on the one hand, the amount of total cash/savings of the borrowers and, on the other hand, the size of the credit expansion of the banks.
- Annual growth rate (AGR), expressed as a percentage of annual change of GDP growth based on the year 2000. With this indicator, we examined the impact of economic development of the country, which as mentioned above is a determining factor in the occurrence of NPLs.
- The house prices variable (HP) reflects annual changes in house prices, based on the year 2000. This indicator examines the course of house prices as a factor that affects the changes in NPLs. In particular, a sharp drop in prices may lead to an increase in non-performing loans, as it is expected to cause borrowers to be reluctant to repay a loan with a higher face value than the current market value of the home.
- Overall inflation (OI), based on the year 2000, as a factor that shapes prices through supply and demand.
- Government debt-to-GDP ratio (GD), based on the year 2000. This indicator is the main meter of the strength of a state, as it reflects the ability to repay government debt by own means.
- Taxes on goods and services (%) of revenue (TAX). The above index shows the percentage of impairment of the average gross income due to the imposed taxes. In addition to labor taxes, other property taxes are included.
- Other taxes (%) of revenue (OT). These include value added tax, selective excise duty, and selective tax on services and on the use of goods or real estate. In essence, any additional tax reduces disposable income and, therefore, the ability to repay loans.
- Correlation test: Separately, for each country, the normality of the data was examined through the Kolmogorov–Smirnov test. The data of all countries were found to follow normal distribution (p> 0.05) and, therefore, the Pearson coefficient was used to examine the negative and positive correlations between NPLs and the other independent variables of each country.
- Heteroscedasticity test: In all countries, the price distribution was checked. Based on the distribution of data, there does not appear to be any heteroscedasticity. The White test was performed to check the heteroscedasticity.
- Autocorrelation test: The values obtained by the price fluctuation through the R and R2 indicators in the regression model for each state were checked. Values indicate a high degree of correlation between the dependent variable (NPLs) and the independent variables. The high values of the adjusted R square and R2 also indicate that the regression model matches the data. The Durbin–Watson test was performed to check the autocorrelation of the residuals.
- Multicollinearity test: The values of the swelling coefficient (VIF—variance inflation factor) were used to check the multilinearity. In combination with the tolerance index, it was found that there is no question of multilinearity nor a possible correlation.
- OLS: Following the tests above, the ordinary least squares method (OLS) was used, taking into account the independent variables, which are statistically significant and affect the dependent variable of each country.
- The loan-to-deposit ratio, as a banking factor and quality management metric, has statistical significance in 2 out of 4 countries in Southern (Greece and Italy) and in 2 out of 4 countries in Central Europe (Netherlands and Belgium), but displays a different effect. Specifically, in the central countries, there is a negative impact of the loan-to-deposit ratio to NPLs. We consider this fact to be related both to the differences in the savings mentality of the member states and that the credit expansion in these states is not accompanied by an increase in NPLS, suggesting stricter credit scoring and more effective credit risk management. The importance of this indicator (LTD) has also been highlighted by Cerulli et al. (2017).
- The annual growth rate and house prices in Greece have a significant positive and negative effect, respectively. These indicators do not seem to have an impact on other countries, which was not expected, as their importance was highlighted by most of the aforementioned studies. The importance of the annual growth rate from Messai and Jouini (2013) was particularly emphasized, as well as from Makri et al. (2014), Anastasiou et al. (2016), Cerulli et al. (2017), and finally Kosikova and Pastyrikova (2020). The importance of the house prices index has been highlighted by Tajaddini and Gholipour (2017).
- The government debt ratio is statistically significant in 2 of the 4 countries of Southern (Greece and Italy) as well as in 2 of the 4 countries of Central Europe (Germany and Belgium), with a positive effect on the NPLs of these states agreeing with the aforementioned study of Makri et al. (2014) and confirming the connection between the economy and the quality of the loan portfolio.
- Regarding the consumer price indices, the paradox of their negative effect on the NPLs of Greece and France was observed. In particular, the opposite effect was expected, i.e., that an increase (or decrease) in prices would lead to an increase (or decrease) in NPLs, given that an increase in consumer prices directly leads to an increase in the cost of living and thus reduces disposable income.
- For the other variables, it is worth mentioning the unemployment rate, which seems to have no significant impact on Greece but a positive impact on two of the other southern countries (Spain and Italy) and in 1 of the 4 central countries (France). This fact was not expected, taking into account the above studies (with the exception of Cerulli et al. (2017)) that record the great importance attached to this variable, as an indicator of economic growth.
- Finally, an unexpected result was the insignificance of the variables nominal unit labor cost and taxes on goods—services of revenue. Although they were not examined by other surveys (except for taxes examined by Anastasiou et al. (2016)), we expected that these factors would be important, at least for Greece, as during the crisis, there was a large decrease in wages and at the same time an increase in direct and indirect taxes. The above may be explained on the basis of the savings culture of the Greeks who resorted to their savings using their cash to meet needs. On the contrary, it seems that both variables were important for France, while Belgium’s NPLs were considerably affected only by the nominal unit labor cost. It is worth noting that in France, changes in labor cost have a positive effect on NPLs, which was not expected.
- Power Distance—PDΙ
- Masculinity vs. Femininity—MAS
- Uncertainty Avoidance—UAI
- Long-term orientation vs. Short-term orientation—LTO
- Indulgence vs. restraint—IVR
- Southern Europe
- Central Europe
- Individualism—IDV: The collectivist character of Greek society (score 35) was applied to the consumer price indices, the increase in which affected the disposable income resulting in the increase in NPLs. The extended family took care of its members affected by the crisis, in exchange for their trust and devotion.
- Power distance—PDI: High rates of NPLs in Greece can be justified by the high score in this criterion. The Greek state, which was responsible for the crisis, took responsibility for its failure, which appears in the government debt ratio (%) and annual growth rate.
- Masculinity—MAS: This criterion does not seem to be directly applicable to any of the statistically significant determinants of NPLs.
- Uncertainty Avoidance—UAI: Greece, with a score of 100, is absolute in trying to avoid uncertainty. We consider that it applies to the economic criterion loan-to-deposit ratio, which is an indication of a decrease in deposits with banks. In addition, a high government debt ratio and low economic performance (annual growth rate and house prices) indicate a two-way lack of trust between the government and citizens.
- Long-Term Orientation—LTO: The long-term poor performance of the economy and growth (government debt ratio, annual growth rate and house prices) shows that Greece does not have long-term orientation. The low score (45) in the corresponding Hofstede criterion is, therefore, verified.
- Indulgence—IVR: This criterion does not seem to be directly applicable to any of the statistically significant determinants of NPLs.
- Greece, based on the rating of individualism/collectivism (IDV) and power distance (PDI), shows a “collectivist” culture. This means rewarding strong bonds of social groups, such as family and friends, who always tend to protect their members. There is also a tendency to respect both hierarchical structures and the acceptance of social inequalities.
- Combined with the high value of “masculinity” versus “femininity” (MAS), the importance of individual success or failure that directly affects the status of the individual’s social group is highlighted. Thus, it is considered normal for someone with non-performing loans to seek and receive protection either from their relatives or from the state that has shown a willingness to protect borrowers and victims of the crisis (e.g., laws on the suspension of auctions, “Katseli’s Law” for the protection of borrowers and new bankruptcy law).
- At the same time, the value of the indulgence versus restraint index (IVR) represents the exact average of the scale, so we can understand that the Greek society appears to be, depending on the circumstances, either tolerant or strict in cases of non-compliance with loan obligations. In the case of Greece, the prevailing view is that the crisis stemmed from the failure of state choices, thus justifying any individual responsibility of the borrowers, further exacerbating the problem.
- The above, in combination with the high value of the uncertainty index (UAI), suggests that the Greek population does not like the uncertainty of NPLs. However, they prefer to invest time and money in fun and socializing, rather than in the service of their obligations, as they are expressive and enthusiastic. They have a relatively short-term orientation and a short-sighted perspective, which is also proven by the values received by the long-term orientation vs. short-term orientation index (LTO).
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|Individualism/Collectivism—IDV||“Individualism is the extent to which people feel independent, as opposed to being interdependent as members of larger wholes. Individualism does not mean egoism. It means that individual choices and decisions are expected. Collectivism does not mean closeness. It means that one “knows one’s place” in life, which is determined socially. With a metaphor from physics, people in an individualistic society are more like atoms flying around in a gas while those in collectivist societies are more like atoms fixed in a crystal”|
|Power Distance—PDI||“Power Distance is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This dimension is thought to date from the advent of agriculture, and with it, of large-scale societies. Until that time, a person would know their group members and leaders personally. This is not possible where tens of thousands and more have to coordinate their lives. Without acceptance of leadership by powerful entities, none of today’s societies could run”.|
|Uncertainty Avoidance—UAI||“Uncertainty avoidance deals with a society’s tolerance for uncertainty and ambiguity. Uncertainty avoidance has nothing to do with risk avoidance, nor with following rules. It has to do with anxiety and distrust in the face of the unknown, and conversely, with a wish to have fixed habits and rituals, and to know the truth.”|
|Masculinity vs. Femininity—MAS:||“Masculinity is the extent to which the use of force in endorsed socially. In a masculine society, men are supposed to be tough. Men are supposed to be from Mars, women from Venus. Winning is important for both genders. Quantity is important and big is beautiful. In a feminine society, the genders are emotionally closer. Competing is not so openly endorsed, and there is sympathy for the underdog. This is NOT about individuals, but about expected emotional gender roles. Masculine societies are much more openly gendered than feminine societies.”|
|Long-Term Orientation vs. Short-Term Orientation—LTO||“Long-term orientation deals with change. In a long-time-oriented culture, the basic notion about the world is that it is in flux and preparing for the future is always needed. In a short-time-oriented culture, the world is essentially as it was created, so that the past provides a moral compass, and adhering to it is morally good. As you can imagine, this dimension predicts life philosophies, religiosity, and educational achievement.”|
|Indulgence vs. Restraint—IVR||“Indulgence is about the good things in life. In an indulgent culture it is good to be free. Doing what your impulses want you to do, is good. Friends are important and life makes sense. In a restrained culture, the feeling is that life is hard, and duty, not freedom, is the normal state of being.”|
|NPLs % Total Gross Loans||Unemployment Rate||Nominal Unit Labour Cost||Consumer Price Indices||Long Term Cost of Borrowing||Loan to Deposit Ratio||Annual Growth Rate||House Prices||Overall Inflation||Government Debt Ratio||Taxes on Goods and Services of Revenue||Other Taxes of Revenue|
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