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Nexus between unemployment and non-performing loans: evidence from the euro area

Masurashvili, Nino
(2024)

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Details

Supervisors
Candelon, Bertrand
Faculty
Louvain School of Management
Degree label
Master [120] en sciences de gestion, à finalité spécialisée
Abstract
This paper examines the relationship between unemployment and non-performing loans. Recognized as a major threat to bank financial stability, non-performing loans are closely monitored by the European Central Bank as they can have a significant impact on the soundness of the European banking system. Meanwhile, unemployment is argued to be associated with lower income, leading borrowers to face difficulties in servicing debt obligations. We use econometric methods to examine this relationship on panel data from 20 euro area countries for the period 2008-2021 while controlling for several macroeconomic variables. We analyze both long-run dynamics, using pooled OLS with year-fixed effects and short-run dynamics, using two-way fixed effects. We found a positive and significant relationship between unemployment and non-performing loans. However, due to potential endogeneity bias, we cannot establish a causal relationship between unemployment and NPLs, and a further methodological approach is needed to address this issue.