Analysis of relationship models between the macroeconomic indicators and Non-performing loans in the Commercial banks of Cyprus

Abstract

The purpose of this paper is to determine and analyze the impact of the macroeconomic indicators on the Level of Non-performing loans (NPLs) in the Commercial banks of Cyprus, as well as determine the magnitude and nature of relationship between them. The object of this study shall be the Commercial banks of Cyprus. The paper reviews the impact of the macroeconomic changes on the Level of Non-performing loans in the Commercial banks of Cyprus between 2000 and 2018Q4. The macroeconomic indicators studied include: Gross Domestic Product at market prices Real GDP (GDP), Unemployment (UNEMP) and Inflation ratesHarmonized Index of Consumer Prices (HICP). The methodology of the study is based on theoretical and methodological analyses of scientific literature, statistical and econometric methods, as well as on observations, comparative method, description, measurements, analysis, modelling and forecasting. In order to develop the statistical models, representing the relationship between macroeconomic indicators and NPLs in Cyprus, the author is using a Simple linear correlation and such data analysis methods as Coefficient of correlation and Coefficient of determination. For creation of short-term forecast of NPLs in Cyprus between 2019 and 2022, the author has used a Simple linear regression. The results of this study show that the obtained Linear model of relationship between the UNEMP and NPLs is near perfect. Thus, this linear model is used by the author for the preparation of a short-term forecast. In turn, the Linear model of relationship between the HICP and NPLs is describing mentioned data and the studies confirm that a statistically significant linear dependency exists between UNEMP and HICP and NPLs in Cyprus. In addition, the obtained Linear model of relationship between GDP and NPLs does not describe mentioned data (no linear relationship or weak relationship) and the studies confirm that there is not enough evidence to prove that a statistically significant linear dependency exists between GDP and NPLs in Cyprus. In general, the author proposes that the people formulating policies in the country should pay special attention to the determinants of NPLs, since the deteriorating conditions of NPLs will affect both individual lenders and their ability to timely repay the loans, and also the banking establishments and the general financial system of Cyprus. The practical significance of the studies carried out in the scope of the paper is in the fact that the obtained results of the studies may be used as an informative material for the government, business and educational purposes. Keywords—non-Performing Loans, Commercial Banks, GDP, Unemployment Rate, Inflation Rate, Coefficient of Correlation, Coefficient of Determination