Loan quality in Central European banks: do shareholders and downturns matter?

Purpose The aim of our paper is to examine the link between loan quality in banks and their shareholder structure. We study the relationships between bank owners and the level of non-performing loans over a long time period, accounting for different moments in the economic cycle. We thereby extend the existing literature on shareholder-driven differences in loan supply during crisis and non-crisis times, addressing agency problems in banks. Design/methodology/approach Our sample consists of 211 banks in 11 Central European countries. We account for the years 2004–2021 and include a hand-input database of primary shareholders. We estimate a static model for panel data with random effects, including robustness tests such as a system GMM estimation and a sub-sample analysis. Findings We find that state-owned banks are associated with worse loan quality when compared to private banks. Foreign banks do not differ from their privately owned domestic peers. Our results imply that non-performing loans emerge with a time delay after an economic downturn. For post-crisis times, we identify significantly poorer loan quality in state-owned banks in relation to private banks. These high non-performing loans persist over a long period, exposing difficulties of the portfolio clean-up process. Thus, our findings carry relevant policy recommendations for state-owned banks, including institutional reforms and regulatory oversight. Originality/value This paper focuses on the little-studied issue of the long-term dynamics of credit risk in Central European banks, in the context of shareholder structure and different timing of the economic cycles. The cross-country sample provides a more universal setting for the analysis and includes many post-transition years, which allows us to study the consequences of state and foreign presence on loan quality.