Tài liệu The impact of credit risk on profitability in commercial banks in vietnam luận văn thạc sĩ

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Master’s thesis Supervisor : Dr Pham Huu Hong Thai The IMPACT of CREDIT RISK on PROFITABILITY IN cOMMERCIAL BANKS in vietnam By Trong Quoc Tran Email : trong906@gmail.com Tel : 0907003639 HOCHIMINH CITY-2010 Master’s thesis Supervisor : Dr Pham Huu Hong Thai ACKNOWLEDGEMENT I would like to express my thankfulness to all those who gave me the possibility to complete this research project. I am grateful all authors who have given me a source of referential documents in the process of writing my thesis. Especially, I am deeply indebted to my supervisor Dr Pham Huu Hong Thai, whose support, interest, encouragement and suggestion supported me during the research and writing process of this research project. I also send to my gratitude to all teachers Financial and banking department has encouraged and help me this completes my thesis. I would like to thank the library staff of the University of Economics Ho Chi Minh City for their relentless effort in making access to research data and literature possible. Abstract By: Tran Quoc Trong 2 Master’s thesis Supervisor : Dr Pham Huu Hong Thai Nowadays, Credit risk management in banks has become more important because of the financial crisis that the world is experiencing. Since granting credit is one of the main sources of income in commercial banks, the management of the risk related to that credit affects the profitability of the banks. The study evaluates the impact of credit risk on profitability in Commercial Banks in Vietnam for the period of 2005-2009. Using financial ratios such as Return on Asset (ROA), Return on Equity (ROE), Nonperforming loan (NPL) analyze. In the study try to find out how the credit risk management affects the profitability in banks. The study is limited to identifying the relationship of credit risk management on profitability of twenty commercial banks in Viet Nam. The results of the study are limited to banks in the sample and are not generalized for the all the commercial banks in Viet Nam. Furthermore, as the study only uses the quantitative approach and focuses on the description of the outputs from SPSS, the reasons behind will not be discussed and explained. The quantitative method is used in order to fulfill the main purpose of the study. The study have used regression model to do the empirical analysis. In the model the study have defined ROE as profitability indicator while NPLR and CAR as credit risk management indicators. The data is collected from the sample banks annual reports (20052009) and capital adequacy and risk management on financial reports (20052009) in twenty commercial banks. The findings and analysis reveal that credit risk has effect on profitability in all twenty banks. Keywords: credit risk management, profitability, banks By: Tran Quoc Trong 3 Master’s thesis Supervisor : Dr Pham Huu Hong Thai List of Acronyms Adj. R2 Adjusted R-squared BCBS Basel Committee on Banking Supervision CAR Capital Adequacy Ratio CCF Credit Conversion Factors Coef. Coefficient CRD Capital Requirements Directives FIRB Foundation Internal Rating-based FSA Financial Supervisory Authority ICAAP Internal Capital Adequacy Assessment Process IFRS International Financial Reporting Standards IRB Internal Rating-based LGD Loss Given Default N Number (of Observations) NI Net Income NPL Non-performing Loan NPLR Non-performing Loan Ratio PD Probability of DefaultP-value Probability Value R2 R-squared ROA Return on Assets ROE Return on Equity RORAC Return on Risk Adjusted Capital RWA Risk Weighted Asset SFSA Swedish Financial Supervisory Authority Signif. Significance TL Total Loan TSE Total Shareholders’ Equity By: Tran Quoc Trong 4 Master’s thesis Supervisor : Dr Pham Huu Hong Thai TABLE OF CONTENT TITLE PAGES PAGES ACKNOWLEDGEMENT (2) Abstract (3) List of Acronyms (4) CHAPTER ONE 1.Introduction (8) 1.1 Statement of problems (8) 1.2 Problem Discussion (10) 1.3 Research question (10) 1.4 Objective of the study (11) 1.5 Scope of the study (12) 1.6 Layout of the study (12) CHAPTER TWO LITERATURE REVIEW 2.1 The relationship between profitability and capital (13-14) 2.2 The relationship between capital and risk (14-15) 2.3 The relationship between risk and profitability (15-16) 2.4 Previous Studies 2.4.1 ROE – profitability indicator (17-18) 2.4.2 Credit risk management indicators (18-19) 2.4.3.Capital and profitability : (19-20-21-22) 2.5 Theories 2.5.1 Risks in banks (23) 2.5.2 Credit risk management in banks (24) 2.5.3 Bank Profitability 2.6 Regulations 2.6.1 The Basel Accords (24-25-26) (28) (28-29-30) CHAPTER THREE METHODOLOGY By: Tran Quoc Trong 5 Master’s thesis Supervisor : Dr Pham Huu Hong Thai 3.1 Research approach (31) 3.2. Hypothesis (31) 3.3 Sampling (32) 3.4 Data Collection (32) 3.5 Data analyzing instruments (32-33) 3.6 Applied regression model (33) 3.6.1 Dependent variable (33) 3.6.2 Independent variables (33) 3.6.3 Regression analysis explained 3.7.Reliability and validity (34-35-36-37) (37-38) CHAPTER FOUR : OVERVIEW OF THE COMMERCIAL BANKING SYSTEM IN VIETNAM 4.1.The commercial banking system of Vietnam was the process of transition from mono-banking system to commercial banking system. (39) 4.2 Role of commercial banks in the economy (39-40) 4.3 Banking system of the role of trade in Vietnam after 20 years (40-42) 4.4.Opportunities for Vietnam's commercial banking system (42-43) 4.5 The difficulties and challenges for Vietnam's banking system (44-45) CHAPTER FIVE : EMPIRICAL RESULT AND DISCUSSION 5.1Overview of the banks studied (46-48) 5.2 Return on Equity (ROE) (50-52) 5.3 Non-Performing Loan (NPLR) (54-55) 5.4 Capital Adequate Ratio (CAR) (56-57) 5.6.Basel I and basel II application affect CHAPTER SIX : CONCLUSION AND SUGGESTIONS (60-61) 6.1. Conclusion 6.1. Conclusion By: Tran Quoc Trong (66-67) 6 Master’s thesis Supervisor : Dr Pham Huu Hong Thai CHAPTER ONE INTRODUCTION 1. Introduction In this chapter, we present the background of the thesis followed by the problem statement. The discussion also contains the motivation for our thesis. Finally, we present the research question, the purpose of this thesis and limit the area of the study. 1.1 Statement of problems Credit activities are crucial of Vietnam banking system, They bring 80-90% to income for each bank, but the risks are not less. Credit risk will be higher than the enormous influence to business banking. Facing the opportunities and challenges of the process of international economic integration, the issue of raising the competitiveness of the domestic commercial banks with foreign commercial banks, in particular improving the quality of credit, risk reduction has become urgent. Besides, the world economic situation is complicated and the risk of increasing the credit crisis. Vietnam is a country with open economy should not avoid the effects of the world economy. Facing this situation, requires commercial banks of Vietnam must improve the management of credit risk, limited to the minimum possible risks, causing potential risks. Managing credit risk in financial institutions is critical for the survival and growth of the financial institutions. In the case of banks, the issue of credit risk is even of greater concern because of the higher levels of perceived risks resulting from some of the characteristics of clients and business conditions that they find themselves in. Credit risk refers to the risk of loss because of debtor’s non-payment of a loan or other forms of credit. As they default, delay By: Tran Quoc Trong 7 Master’s thesis Supervisor : Dr Pham Huu Hong Thai in repayments, restructuring of borrower repayments and bankruptcy are also considered as additional risks. When it comes to banking, credit risk is apparent on lending services to clients. There is the need for an effective employment of credit scorecard for the purpose of ranking potential and existing customers according to risk. In this will be based the appropriate measures to be applied by the banks. Nevertheless, banks charge higher price for higher risk customers. Credit limits and faced by lenders to consumers, lenders to business, businesses and even individuals. Credit risks, nevertheless, are most encountered in the financial sector particularly by the institutions such as banks. Credit risk management therefore is both a solution and a necessity in the banking setting. The global financial crisis also requires the banks to regain enough confidence by the public not only for the financial institutions but also the financial system in general and to not just rely on the financial aid by the governments and central banks. It is critical for the banks to engage in better credit risk management practices. Banks are not an exemption. The banks of Vietnam as well as the other over all the World are required to follow Basel II capital adequacy framework from 2007. Basel II aims to build on a solid foundation of prudent capital regulation, supervision, and market discipline, and to enhance further risk management and financial stability. However, it is worth mentioning that regulatory and deregulatory transitions usually end up with the same result. The exposed risk – the main and most difficult one to identify – is the credit risk in the particular current case. The importance of this risk is increased by the fact that it is linked to the problem of collateral. Therefore, it is in need of being deliberately examined and studied. For this reason, Basel II considers varieties of credit risk measurement techniques, wider than Basel I did. The goal is to improve the credit risk By: Tran Quoc Trong 8 Master’s thesis Supervisor : Dr Pham Huu Hong Thai management quality without constraining banks’competitiveness. Regulations should be interactive or flexible to be successful because of rapidly changing technological, political, and economical circumstances. Credit risk measurement tools presented in Basel II intended to be flexible. The banks can either choose from the proposed options or employ their own as long as it gives sound and fair results. The importance of the credit risk management and its impact on profitability has motivated us to pursue this study. We assume that if the credit risk management is sound, the profit level will be satisfactory. The other way around, if the credit risk management is poor, the profit level will be relatively lower. Because the less the banks loss from credits, the more the banks gain.The profitability is the indicator of credit risk management. The central question is how significant is the impact of credit risk management on profitability. 1.2 Problem Discussion The importance of the credit risk and its impact on profitability has motivated us to pursue this study. We assume that if the credit risk management is sound, the profit level will be satisfactory. The other way around, if the credit risk management is poor, the profit level will be relatively lower. Because the less the banks loss from credits, the more the banks gain. Profitability is the indicator of credit risk management. The central question is how significant is the impact of credit risk management on profitability. This thesis is an endeavor to find the answer. 1.3 Research question The discussed background and problem formulation make us to have the following research question: How does credit risk affect the profitability in commercial banks in Vietnam ? 1.4 Objective of the study By: Tran Quoc Trong 9 Master’s thesis Supervisor : Dr Pham Huu Hong Thai The purpose of the research is to describe the impact level of credit risk on profitability in twenty commercial banks in Vietnam. The study is to test the following hypothesis by econometric model : H1: Banks with higher profitability (ROE, ROA) have lower loan losses (NonPerforming Loans/ Total Loans). H2: Banks with higher interest income (net interest/Average total assets, interest net /total income) also have lower bad loans (NPL). H3: The growth of ROE/ ROA may also depend on the capitalization of the banks and operating profit margin. If a bank is highly capitalized through the risk-weighted capital adequacy ratio (RWCAR) or Tier 1 capital adequacy ratio (CAR), the expansion of ROE will be retarded. we test the hypothesis using the following regression model: P(ROA/ROE)= α+β1NPLR+ β2CAR+ ε Using data on 20 commercial banks in Vietnam and our results show no rejection by ourhypothesis 1.5 Scope of the study The research is limited on evaluate the impact of credit risk on profitability in the twenty Banks in Vietnam. Thus, the other risks mentioned in Basel Accords are not discussed. Due to the unavailability of information in annual reports, our sample only contains twenty largest commercial banks and their 5 years’ annual reports from 2005 to 2009 respectively. Since the banks in sample rejected to participate in our internet based survey, the primary data was not possible to obtain. Considering the above mentioned circumstances, the results of the study are limited to twenty commercial banks in the sample and are not generalized for all the banks in Vietnam. Finally, as the study only uses the quantitative approach and focus on the description of the outputs from By: Tran Quoc Trong 10 Master’s thesis Supervisor : Dr Pham Huu Hong Thai SPSS, The study will not go deep to discuss the reasons and give our own explanation. 1.6 Layout of the study : This study is divided into six chapters : • The chapter one : Introduction • Chapter two : Literature review • Chapter three : Methodology • Chapter four : Introduces in general of Vietnam, Jointstock banks and commercial banks • Chapter five : Empirical result and discussion • Chapter six : Conclusion and suggestions By: Tran Quoc Trong 11 Master’s thesis Supervisor : Dr Pham Huu Hong Thai CHAPTER TWO LITERATURE REVIEW In this chapter, we provide theoretical foundation to our study by presenting relevant literature. 2.1 The relationship between profitability and capital It is generally accepted (see Berger, 1995; Barth et al., 1998) that the Capital Asset Ratio (hereafter CAR) is negatively correlated with Return On Capital (here after ROC). According to this hypothesis, the negative relationship is obtained, in a one-period model where deposit rates are not influenced by bank risks. However, assuming information symmetry between the depositors and the bank i.e., ‘market discipline` exists and deposit and stock markets are perfect, a rise in CAR due, for example, to the substitution of equity and debt, should entail a reduction of the bank's risk to fail. In such a case, risk-averse depositors who regard capital as a cushion against unexpected losses will be satisfied with a lower interest rate on deposits. This in turn, ceteris paribus, should increase Net Interest Margin (hereafter NIM) and thus ROC. On the other hand, a rise in CAR increases capital, and therefore may reduce profitability either due to the increase in the denominator of ROC or due to the perception that the bank is safer. Thus, an increase in CAR might have an ambiguous effect on ROC. According to the Expected Bankruptcy Costs Hypothesis , if a bank’s capital is below its optimum level, a rise in capital should reduce the yield required on deposits. Consequently, the increase in net income (the numerator in ROC) will have a greater effect than the rise in By: Tran Quoc Trong 12 Master’s thesis Supervisor : Dr Pham Huu Hong Thai capital (the denominator in ROC), and altogether one can expect a positive relationship between capital and profitability. On the other hand, if capital is above its optimum level as perceived by depositors, the increase in capital reduces the interest rate required on deposits, so that the relationship between capital and profitability is expected to be negative. According to the Signaling Hypothesis (see Acharya, 1988), managers have ‘inside information’ regarding future performance. If their compensation packages include stocks it will be cheaper for a safe bank than for a risky bank to signal expected improved performance in the future by increasing capital today. Therefore, capital entails profitability. Stiroh (2000) gives another argument for this causation. When banks overcome high entry barriers by increasing their capital levels, they gain access to profitable activities such as issuing guarantees and subordinated notes, and acting as intermediators in derivative markets. 2.2 The relationship between capital and risk A negative relationship between capital and risk is expected when all deposits are insured with a flat premium rate i.e., there is no ‘market discipline’. In this case, the marginal cost of increasing bank risk and/or reducing the level of capital is zero. This is because in the view of the regulators, the insurance premium does not change with risk or capital, and for the insured depositors the interest demanded on their deposits is the same as that on a riskless asset. On the other hand, when the insurance premium is adjusted to risk, e.g., including the level of financial leverage, there is less incentive to change the financial leverage (Osterberg and Thomson, 1989). The "optimum capital buffer theory" suggests that banks have an incentive to hold more capital than required as an insurance against a violation of the regulatory minimum capital By: Tran Quoc Trong 13 Master’s thesis Supervisor : Dr Pham Huu Hong Thai requirements (Heid et al., 2004). Hence, banks with relatively large capital buffers expected to maintain their capital buffers (increase both capital and risk) while banks with small capital buffers aim at rebuilding an appropriate capital buffer (increase capital and decrease risk). Alfon et al. (2004), who found a negative relationship between capital and risk in U.K. banks and building societies, mention several explanations for the actual capital levels, which are substantially higher than required. The parameters mentioned are: the distance from minimum capital requirements, the internal risk assessments by bank managers and their sophistication in managing risk, the level perceived as appropriate by rating agencies and depositors (market discipline), and the costs of raising extra capital. Flannery and Rangan (2004) explain the capital build-up of US banks during the 90s by increased capital requirements such as the FDIC Improvement Act (1991), high profitability of the banking industry along with higher risk levels, and the withdrawal of implicit government guaranties (increased market discipline). Cebenoyan and Strahan (2004) found that banks which used the loan sales market for risk management purposes held less capital and were more profitable but riskier than other banks. This evidence is in line with the Froot and Stein (1998) model that active risk management can allow banks to hold less capital and to invest in riskier assets. 2.3 The relationship between risk and profitability Stone (1974), Booth and Officer (1985) and Flannery and James (1984) applied a Two-Index Model in banking. They found a positive correlation between the yield on bank shares and changes in stock and bond indices (reflecting risks). In a competitive business environment where symmetrical information between the bank and its borrowers prevails, one can expect By: Tran Quoc Trong 14 Master’s thesis Supervisor : Dr Pham Huu Hong Thai positive relationships between profitability and risk. This should be the result of risk premium demanded by the bank from its borrowers and by the bank stakeholders (See also Saunders et al., 1990; Shrieves and Dahl, 1992). The trade-offs between pricing credit risk and setting capital aside are mainly related to parameters such as regulation, competition, sophistication in risk management, and the type of credit portfolios. In particular, a bank might not fully price its loan portfolio for the following reasons: (a) Cost of data collection for each borrower or project is usually greater than the benefit. A case in point is mortgages or standard loans, (b) The population of borrowers is relatively homogeneous but not correlated, the amount of the particular loan is not significant, and the distribution of loan repayments is relatively known, (c) The risk is not directly connected to the borrower e.g., management or operational risks. In practice, banks price credit risk and simultaneously set aside capital so the differences between various banking sectors e.g., commercial and saving/mortgage banks are related maily to the dosages of capital and profitability. This is true despite the blurring of the distinction between commercial and saving/mortgage banks during the past few years. Below we link profitability, capital, and credit risk based on Froot and Stein (1998) and EBCH adjusted to credit risk. In this chapter, we provide theoretical foundation to our study by presenting relevant literature. 2.4 Previous Studies 2.4.1 ROE – profitability indicator ROE as an important indicator to measure the profitability of the banks has been discussed extensively in the prior studies. Foong Kee K. (2008) indicated that the efficiency of banks can be measured by using the ROE which By: Tran Quoc Trong 15 Master’s thesis Supervisor : Dr Pham Huu Hong Thai illustrates to what extent banks use reinvested income to generate future profits1. The measurement of connecting profit to shareholder’s equity is normally used to define the profitability in the banks. Furthermore, the paper “Why Return on Equity is a Useful Criterion for Equity Selection” has mentioned that ROE provides a very useful gauge of profit generating efficiency. Because it measures how much earnings a company can get on the equity capital. The ROE is defined as the company’s annual net income after tax divided by shareholder’s equity. NI is the amount of earnings after paying all expenses and taxes. Equity represents the capital invested in the company plus the retained earnings. Essentially, ROE indicates the amount of earnings generated from equity. The increased ROE may hint that the profit is growing without pouring new capital into the company. A steadily rising ROE also refers that the shareholders are given more each year for their investment. All in all, the higher ROE is better both for the company and the shareholders. In addition, ROE takes the retained earnings from the previous periods into account and tells the investors how efficiently the capital is reinvested. In accordance with the study Waymond A G. (2007), profitability ratios are often used in a high esteem as the indicators of credit analysis in banks, since profitability is associated with the results of management performance. ROE and ROA are the most commonly used ratios, and the quality level of ROE is between 15% and 30%, for ROA is at least 1%. The study of Joetta C (2007) presented the purpose of ROE as the measurement of the amount of profit generated by the equity in the firm2 . It is also mentioned that the ROE is an indicator of the efficiency to generate profit from equity. This capability is connected to how well the assets are utilized to produce the profits as well. The effectiveness of assets utilization is significantly tied to. 2.4.2 Credit risk management indicators By: Tran Quoc Trong 16 Master’s thesis Supervisor : Dr Pham Huu Hong Thai In response to recent corporate and financial disasters, regulators have increased their examination and enforcement standards. In banking sector, Basel II has established a direct linkage between minimum regulatory capital and underlying credit risk, market risk and corporate risk exposure of banks. This step gives an indication that Capital management is an important stage in risk mitigation and management. However, development of effective key risk indicators and their management pose significant challenge. Some readily available sources such as policies and regulations can provide useful direction in deriving key risk indicators and compliance with the regulatory requirement can be expressed as risk management indicators. A more comprehensive capital management framework enables a bank to improve profitability by making better riskbased product pricing and resource allocation. The purpose of Basel II is to create an international standard about how much capital banks need to put aside to guard against the types of risk banks face. In practice, Basel II tries to achieve this by setting up meticulous risk and capital management requirements aimed at ensuring that a bank holds capital reserves appropriate to the risks the bank exposes itself to. These rules imply that the greater risk which bank is exposed to, the greater the amount of capital a bank needs to hold to safeguard its solvency. The theoretical banking literature is, however, divided on the effects of capital requirements on bank behavior and consequently, on the risks faced by the institutions. Some academic works point toward that capital requirement clearly contributes to various possible measures of bank stability. On the contrary, other works conclude that capital requirements make banks riskier institutions than they would be in the absence of such requirements. Jeitshko and Jeung (2005) have discovered numerous aspects that explain the differing implications of portfolio-management models By: Tran Quoc Trong 17 Master’s thesis Supervisor : Dr Pham Huu Hong Thai for the responsiveness of bank portfolio risk to capital regulation. Results depend on banks being either value-maximizing or utility-maximizing firms; bank ownership (if limited liability) and whether banks operate in complete or incomplete asset markets. Moreover, the effects of capital regulation on portfolio decisions and therefore on the banking system’s safety and soundness eventually depend on which perspective dominates among insurers, shareholders, and managers in the principal-agent interactions. 2.4.3.Capital and profitability : Theory provides contradictory forecast on whether capital requirements limit or enhance bank performance and stability. The soundness of the banking system is important because it limits economic downturn related to the financial anxiety. Also, it avoids unfavorable budgetary consequences for governments which often bear a substantial part of bailouts cost. Prudential regulation is expected to protect the banking system from these problems by persuading banks to invest prudently. The introduction of capital adequacy regulations strengthen bank and therefore, enhance the resilience of banks to negative shocks. However, these rules may cause a shift of providing loans from private sector to public sector. Banks can comply with capital requirement ratios either by decreasing their risk-weighted assets or by increasing their capital. Goddard, Molyeux and Wilson (2004) analyzed the determinants of profitability of European banks. The authors found a considerable endurance of abnormal profits from year to year and a positive relationship between the capital-to-asset ratio and profitability. Demirguc-Kunt and Huizinga (1999) examined how capital requirement alter the incentives that banks face. An increase in capital requirement necessitates banks to substitute equity for deposit financing, reduce shareholder’s surplus. The By: Tran Quoc Trong 18 Master’s thesis Supervisor : Dr Pham Huu Hong Thai decline in surpluses intensifies the probability of loss, driving a rise in the cost of intermediation to sustain profitability. In support of this hypothesis, authors have provided empirical evidence showing a significant effect on interest margins pursuant to higher capital holdings and the share of total assets held by banks. The evidence also supports higher net interest margins and more profitability for well-capitalized banks. This is in harmony with the fact that banks with high capital ratio have low interest expenses due to less probable bankruptcy costs. Samy and Magda (2009) focus on the impact of capital regulation on the performance of the banking industry in Egypt. The study provides a comprehensives framework to explicitly measure the effects of capital adequacy on two specific indicators of bank performance: cost of intermediation and profitability. The results provide a clear illustration of the effects of capital regulations on the cost of intermediation and banks’ profits. As CAR internalizes the risk for shareholders, banks increase the cost of intermediation, which supports higher return on assets and equity. These effects appear to increase progressively over time, starting in the period in which capital regulations are introduced and continuing 2 years after the implementation. Nonetheless, the evidence does not support the hypothesis of a sustained effect of capital regulations over time, or variation in the effects with the size of capital across banks. The authors have concluded that a number of factors contributed positively to banks’ profitability in the postregulation period: higher capital requirements, the reduction in implicit cost, and the increase in management efficiency. Countering effects on banks’ profitability were attributed to the reduction in economic activity and, to a lesser extent, to the reduction in reserves. An improvement of cost efficiency is not reflected in a reduction in the cost intermediation or an improvement in By: Tran Quoc Trong 19 Master’s thesis Supervisor : Dr Pham Huu Hong Thai profit. The effect of better efficiency is likely to have been absorbed in banks’ fees and commissions. Non-performing loans. Why NPL occurs? The International Monetary Fund (2001) presents two main reasons for that: poor risk management and plain bad luck in form of external independent factors. The inflation, deregulation and special market conditions can lead to poor credit lending decision which in turn leads to NPLs. In fact, many NPL studies are conducted in the countries with financial market recession. In prior studies, NPL is usually mentioned in East Asian countries’ macroeconomic studies, while they run into serious economic downturn, as one of the financial and economical distress indicators. Japan and China, are those of most mentioned in this regard. Moreover, IMF working paper from December 2001 encourages better account of NPL for macroeconomic statistics which makes NPL to be widely used in macroeconomic statistics. Moreover, Hippolyte F. (2005) advocates that macroeconomic stability and economic growth are associated with declining level of NPLs, while the adverse macroeconomic situation is associated with rising scope of NPLs. Ongoing financial crises suggest that NPL amount is an indicator of increasing threat of insolvency and failure. However, the financial markets with high NPLs have to diversify their risk and create portfolios with NPLs along with Performing Loans, which are widely traded in the financial markets. In this regard, Germany was one of the leaders of NPL markets in 2006 because of its sheer size and highly competitive market. Also, Czech Republic, Turkey and Portugal are noticeable NPL markets in EU according to Ernst &Young’s Global Non-performing Loan report (2006). Nonetheless, not many studies have done research on NPL market in Western Europe or Scandinavia. Empirical study of Petersson J et al. (2004), states that during the crises in the early 1990’s in Sweden, the Swedish government created the workout units in order to improve the situation with By: Tran Quoc Trong 20
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