CHANGES IN THE QUALITY OF THE LOAN PORTFOLIO IN THE POLISH BANKING SYSTEM

Abstract

The aim of this study is to examine the impact of changes in market conditions, the financial standing of enterprises and banks` capital requirements on the quality of the corporate loan portfolio in the Polish banking sector before and during COVID-19. The methodology of changes in the quality of the loans portfolio (QLP) corresponds to the methodologies used by central banks, e.g. by National Bank of Poland (NBP) and International Monetary Fund (IMF). This research applied Vector Error Correction Model (VECM) and also impulse response functions and decompositions of variables. This research used quarterly time-series data during 2009–2020 and a simple moving average filter (SMA). The empirical results of the VECM confirmed the importance of indicators of revenues, economic development (GDP), investments and costs of obtaining revenues on the part of corporations and total own funds on the part of banks. Evaluation of the EC1 indicates that the strongest correction of the deviation from long-term equilibrium occurs in the case of the revenues from the overall activity of corporations (ROAC), GDP equations and gross fixed capital formation (GFCF) and costs of obtaining revenues from the overall activity of corporations (CROAC) equations. Results of the analysis of the impulse function and variance decomposition confirmed the importance of market indicators and the financial situation of companies in explaining changes in the QLP. Analysis of the QLP response to impulses from the explanatory variables confirmed that the strength of the influence of these impulses increased over time. In the 4th quarter, the strongest QLP responses to impulses came from: CPI, ROAC and GDP. Nevertheless, in the 19–20th quarter (5th year) of the forecast, the QLP response was the strongest, including apparently against ROAC and CPI. Results of QLP decomposition indicate that in the 1st quarter these changes are fully accounted for with their own forecast errors. In the 4th – 20th quarter, their own changes lose significance and mainly by CPI, ROAC and GDP grow in significance, with less importance of other variables. The added value of the analysis is that QLP research confirmed the pro-cyclical nature of lending activity in Poland in the verified years. The empirical results may be of practical use by banks in modeling the dynamics and quality of the corporate loan portfolio. These findings provide insights for future asset quality reviews (AQR) required by European supervision.

Keywords

• Corporate loan portfolio
• Loan impaired
• non-financial corporation
• Polish banking system
• VECM

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