Bank-specific factors and non-performing loans in the banking sector: Comparative analysis of the Canadian and United States banking sector

Abstract

This study aims to examine the nexus between bank-specific factors and non-performing loans, comparing the level of activities managers undertake towards non-performing loans, using data from Canadian and United States banks. There has been a lack of comparative studies researching the effect of bank-specific factors on non-performing loans in Canada and the United States in a single study of lending behavior and the extent of manager efficiency in mitigating the issue of non-performing loans. Consequently, in bridging the gap in the literature and contributing to knowledge, this study examines the effect of bank-specific factors on non-performing loans using a panel regression analysis of standard fixed and Driscoll-K fixed effects. The study explored credit growth, loan loss provisions, bank diversification, operating efficiency, net interest margin, and return on assets as the explanatory variables to measure bank-specific factors. The results of the regression showed that, comparatively, loan loss provisions, bank diversification, operating efficiency, and net interest margin exhibited positive and significant effects on non-performing loans, whereas credit growth and return on assets exerted negative effects on the non-performing loans of banks listed on the Toronto Exchange. On the other hand, while bank diversification, operating efficiency, and net interest margin exhibited positive and significant effects, credit growth, loan loss provisions, and return on assets exerted negative effects on the non-performing loans of banks listed on the New York Stock Exchange. The study recommends that managers implement stringent credit risk assessment frameworks and ensure a loan monitoring system to proactively manage and reduce non-performing loans.