CONVERGENCE IN TERMS OF NON-PERFORMING LOANS IN THE BANKING SECTOR: EUROPEAN UNION COUNTRIES

Abstract

Banks perform an important function in transferring funds to parties in need of capital and the stability of the banking system is vital for economic growth and development. With the developing financial markets and the integration of the world banking system, the stability of the banking system has become a concern for all economies of the world rather than being a national or regional target and/or problem. In this framework, analyzing the stability of the banking system in the European Union countries can provide important data. In this framework, the aim of this study is to reveal the convergence among the member countries of the European Union (member and candidate) based on the non-performing loan ratios of banks operating in the member countries within the framework of the economic integration process. For this purpose, analyses were conducted with the Result of Updated Panic LM Test (Dummy Breaks, Factor) procedure developed by Payne et al. (2022) using the non-performing loan ratios for the period 1997-2022 in the European Union countries. As a result of the analyses, convergence at various levels of significance was found between Belgium, Denmark, Estonia, France, Germany, Italy, Latvia, the Netherlands, North Macedonia, Poland, Spain and Türkiye. Moreover, when the break periods are evaluated, it is observed that the regulations in the banking sector affect the convergence relations. The study is expected to make important contributions to decision makers, national policy makers and the banking sector in terms of banking sector standards. It also contributes to the literature as it is the first study that deals with convergence based on non-performing loans (NPLs).