Credit risk determinants in the banking system: Evidence from West Balkan countries

Abstract

Credit risk is one of the major elements while taking banking management into account and therefore it is of the essence to habitually monitor what exerts a significant influence. West Balkan countries are prone to fluctutations of credit risk as the region is infulenced by turbulence of financial markets. For that reason, these countries are in the focus while conducting the research. The prime objective of this paper is to closely examine the factors which significantly contribute to the level of credit risk in the period from 2013 to 2025 in that effective credit risk management could be performed in the long-run. The research was conducted by using panel data regression analysis with random effects on variables. Credit risk, as a dependent variable, is measured in non-performing loans to total gross loans. On the other hand, explanatory variables include return on assets (ROA), reference interest rate, bank size, liquid assets to total assets, GDP growth and inflation.The results of a random effects model reveal that reference interest rate and GDP growth affect credit risk positively and significantly, whereas bank size, liquid assets to total assets and inflation rate have a negative and significant impact on credit risk.The limitation of the study refers to the fact that the time series covers the period 2013-2025. As well as that, the results of the research cannot be applied to developed countries since the West Balkan countries are considered as emerging countries.