IMPACT OF NON-PERFORMING LOANS ON THE BANKING SECTOR CAPITAL ADEQUACY, WITH THE PREDICTION OF THEIR MOVEMENTS
IMPACT OF NON-PERFORMING LOANS ON THE BANKING SECTOR CAPITAL ADEQUACY, WITH THE PREDICTION OF THEIR MOVEMENTS

Summary/Abstract: This paper analyzes the impact of non-performing loans on Bosnia and Herzegovina banking sector financial stability. For that purposes Error Correction Model and Granger causation model were implemented. Results of Engle-Granger Error Correction model indicates on existence of long-term connection between banking sector financial stability and non-performing loans. Results of the Granger causality model indicates on causation of financial stability by non-performing loans and demonstrates short-term connection between observed variables. Based on these results, a prediction of non-performing loans movements was conducted. Results indicates that non-performing loans in Bosnia and Herzegovina banking sector will range between 0.5% and 16.41%. In order to determine the likelihood that nonperforming loans at the level of Bosnia and Herzegovina banking sector will rise or fall, a Monte Carlo simulation was conducted. This simulation showed that it is much more likely that non-performing loans will decrease, than it will rise.

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