Macroeconomic and Bank Specific Risk Determinants of Credit Losses in the Philippine Setting: A Panel FMOLS Approach

Abstract

The level of credit losses plays an important part in determining the bank’s soundness. Its primary concern is the ability to meet long-term obligations and generate income.  Despite the fast technological changes and various studies on techniques in reducing bank credit losses, there was scanty empirical evidence in the long-run interaction between macroeconomic conditions and bank-level risk factors.  This study aimed to probe the sustainability of growth in the banking system and to maintain financial flexibility by employing variables related to macroeconomic conditions and bank-level risk factors. This study considered macroeconomic factors encompassing economic activity, unemployment, interest rates, exchange rates, and stock market performance, as they influenced borrowers’ repayment capacity and loan performance.  On the other hand, bank-level risk variables included the ability to generate profit, be able to meet current obligations, adequate capital, and lending assertiveness, which indicate the quality of management in the organization and risk-taking behavior of the borrower.  This study employed a quantitative and descriptive correlational research design, which utilizes secondary panel data from key banking subsectors in the Philippines. The research employed both the Panel Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimation techniques to examine the long-run relationships between credit losses and their determinants, focusing on non-stationary properties and cointegrated relationships. The scope of years included in the study was from Q1 1999 to Q3 2025, totaling 107 quarters, while the cross-sections included the 5 banking subsectors in the Philippine banking system. Together, these specific corrective measures had been employed to ensure the reliability of the T-statistic values as well as the robustness of the standard errors generated from the Group-Mean Panel FMOLS and DOLS estimations.  The empirical results showed strong evidence of long-run equilibrium or cointegrating relationships between the NPLs across the Philippine banking system and the selected macroeconomic factors, as well as bank-specific determinants, as revealed by the conducted Pedroni Panel Cointegration test and the aforementioned panel cointegrating regression estimations.  Results of the study will enable banks, bank regulators, and policymakers to further enhance monitoring of credit losses to ensure systemic stability and contribute to inclusive and sustainable economic growth in line with SDG 8 and SDG 10.