Policy uncertainty and non-performing loans in Greece

Abstract

Based on the growing interest in understanding the impact of uncertainty on various aspects of the economy, this study investigates the long-run relationship between economic policy uncertainty (EPU), its components, unemployment, capital adequacy, liquidity risk, and non-performing loans (NPLs) in Greece. Our findings indicate several key results: (1) There exists a negative, long-term co-integrating relationship between EPU and its components with financial stability. (2) Unemployment and capital adequacy also exert long-term negative effects on financial stability. (3) These results hold robustly even after decomposing the total NPL ratio into mortgage, consumer, and business NPLs. (4) Consumer NPLs exhibit the slowest adjustment to long-run equilibrium among the NPL sub-categories, with mortgages presenting the fastest rate of adjustment. The findings underscore important policy implications: initiatives aimed at reducing fiscal and banking policy uncertainties and fostering a stable environment for businesses and households could effectively manage NPLs more efficiently, as uncertainty influences NPLs not only in the short run but also in the long run.