Capital flows and non-performing loans: An empirical study of the European debt crisis

This study investigates the relationship between capital imports and non-performing loans (NPLs) in the context of the European debt crisis. The empirical analysis is based on a panel data set covering 22 countries in the European Union (EU) between year 2001 and 2014. All individual estimations in the empirical analysis indicate a significant and negative relationship between capital imports and NPLs. The results are robust in the sense that two different estimation techniques were used: the First-difference Arellano-Bond generalized method of moments (GMM) estimators and Ordinary least squares (OLS). The results support other studies, which emphasize the large inflow of debt-type capital in the pre-crisis period from core EU-countries, such as Germany, the Netherlands and the UK, to periphery countries, such as Greece, Ireland and Spain. This dependency on foreign interbank lending turned into severe national liquidity crises – and increased ratios of NPLs – when European banks in in the beginning of the crisis started to squeeze capital inflows to financial institutions in the periphery economies