Determinants of Impaired Loans and Doubtful Loans in Italy

The work aims to investigate the incidence of banks’ size and financial and macroeconomic indicators on the ratio of impaired loans to gross loans and on the ratio of doubtful loans to total asset. The financial indicators are return on average assets and cost income ratio, as indicators of profitability and efficiency of the bank, while macroeconomic indicators are the inflation rate and the unemployment rate. The study focuses on Italian banks over the period 2008-2014, these are crisis years in which the incidence of impaired loans has grown considerably. The analysis is conducted on a sample composed of 60 Italian banks, divided into 20 joint stock banks, 20 cooperative banks and 20 popular banks. The analysis method is based on multivariate panel regressions models. The empirical analysis shows that the ratio of impaired loans to gross loans and the ratio of doubtful loans to total asset are negatively related to return on average assets and to banks’ size. Therefore, these two variables exert a positive influence on loan quality. The ratio of impaired loans to gross loans is also negatively related to the cost income ratio. Regarding the macroeconomic determinants, results point out that there is a positive relationship between the unemployment rate and both dependent variables. The unemployment rate exerts a negative influence on loan quality