What Drives Non-Performing Loans in Italy? A MacroFinancial Perspective from 2005 To 2024

This study analyzes the macro-financial factors that explain Italian banking sector non-‎performing loans (NPLs) from 2005 to 2024, years marked by unprecedented economic ‎and political volatility. Using the Autoregressive Distributed Lag (ARDL) model, the study ‎accommodates both the short-run dynamics and long-run relationship among NPLs and four ‎driving factors: unemployment, domestic credit, lending rates, and political stability. The results show that, in the long run, high unemployment, rapid credit growth, and rising lending rates have substantial contributions to an increase in NPLs, whereas political stability plays a mitigating role. The results are supplemented with Granger causality tests ‎given in terms of future values of NPLs at the lagged explanatory variables phase. ‎Diagnostic and stability tests confirm the robustness of the model. These findings underscore the need for a concerted policy response towards reforming labor markets, prudent credit risk management, monitoring interest rate sensitivity, and institutional building. ‎In providing contemporaneous and context-specific evidence, the paper contributes to ‎financial vulnerability in Italy and offers real-world policy insights into banking regulation ‎and macroeconomic policy design‎.