A VAR Model for Non-Performing-Loans in Albania

The objective of this paper is to distinguish the relationship of macroeconomic and macro financial factors with non-performing loans in the Albanian banking system for the last 10 years, through a VAR model. VAR models are used to discover the relationship between variables, while the model selection criteria are used to select the appropriate lag. The chosen lag is 4 and the macroeconomic variables besides NPL included in the study are unemployment, economic growth and consumer price index. The results of the model proved that NPL ratio is sensitive to previous periods of NPL movement. Other macroeconomic variables are insignificant related to actual NPL. Furthermore, through the representation of fan charts we expect a reduction on NPL ratio on the upcoming quarter, which signifies a stronger economy.