THE IMPACT OF CREDIT RISK MANAGEMENT ON THE BIG SIZE EU BANKS’ PERFORMANCE: BEFORE AND DURING THE CRISIS

Abstract

Credit risk management is becoming more and more important in the banking profitability. Credit risk is described by the Basel Committee on Banking Supervision (BCBS) as “the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms” (BCBS, 2010, page 13). In the EU banks’ granting credit risk is one of the principle sources of income. Therefore, the credit risk management in connection with that influences the bank profitability. This study investigates the impact of credit risk management on the 40 EU bank performances. The period of 11 years (2003 – 2013) is analysed. The pre-crisis period is analysed which includes 5 years (2003 – 2007). Also, the crisis period is examined which is 6 years (2008 – 2013). Additionally, these 40 EU banks were selected according to asset size of the EU banks. Return on Asset (ROA) and Return on Equity (ROE) were used as the performance indicators while Capital Adequacy Ratio (CAR), Non-Performing Loan (NPL), Loan Loss Provision (LLP) and Loan to Debt (LTD) were used as credit risk management indicators. Additionally, inflation (INF) and Gross Domestic Product Level (GDP Level) were used as a country dummies indicators. Panel data model was employed to estimate the determinants of the profit function.