macroeconomic determinants of non‑performing loans

The article analyses the credit risk in Belgium on the basis of bank asset quality indicators (i.e. nonperformingloans, NPLs) and Central Credit Register data (i.e. payment arrears). These indicators show a relatively high asset quality in Belgium notwithstanding the further increase of the debt ratio of the non-financial private sector over the last years. Moreover, the distribution of households’ assets and debt reveals some ‘pockets of risk’ as a significant proportion of households spend a large part of their income on debt payments and that part of outstanding debt is not well covered by financial assets. Against this background, the article aims to explain the variation in (mortgage) credit risk by means of both macroeconomic and structural determinants such as the business cycle and loan or bank characteristics. The findings show a clear link between macroprudential instruments – such as the debt-service-to-income (DSTI) ratio – and the probability of default (PD). Econometric results confirm that both structural and macroeconomic variables explain the variation in default rates on mortgage loans. Finally, there seems to be a feedback effect of NPLs on macroeconomic conditions in countries where the NPL ratio is high. While a deleveraging process and a reduction in the nonfinancial private sector’s interest charges could help to reduce the NPL stock, additional structural reforms in those countries might be needed.