The Banking Sector and Macroeconomic Performance in Central European Economies*

We present empirical evidence on the macroeconomic variables affecting non-perform-ing loan (NPL) ratios in five central European economies (CEEs). We reach four main con-clusions. First, a slowdown in economic activity can be expected to deteriorate the NPL ratios in the CEEs. Second, in four out of the five countries, foreign direct investment growth appears to improve NPL ratios. Third, an increase in real interest rates has a ne-gative impact on the financial position of borrowers and loan portfolio quality in all the five CEEs. Fourth, in a majority of CEEs, increasing credit to the private sector in-creases the NPL ratio, indicating a need to strengthen the supervision of banks ’ lending activities. 1