International Journal of Business and Management; Vol. 13, No. 10; 2018 ISSN 1833-3850 E-ISSN 1833-8119 Published by Canadian Center of Science and Education 230 Determinants of Non-Performing Loans: Evidence from Europe Antonio Salvi 1 , Candida Bussoli 1 , Lavinia Conca 1 & Marisa Gigante 1 1 Department of Economics and Management, University LUM Jean Monnet, Italy Correspondence: Antonio Salvi, Department of Economics and Management, University LUM Jean Monnet, Casamassima (BA), Italy. E-mail: salvi@lum.it Received: March 29, 2018 Accepted: August 21, 2018 Online Published: September 25, 2018 doi:10.5539/ijbm.v13n10p230 URL: https://doi.org/10.5539/ijbm.v13n10p230 Abstract The issue of banks’ loan quality has assumed growing importance at the international level. This study aims to tackle the issue and to verify the impact of bank-specific determinants and macroeconomic indicators on banks’ loan quality. The analysis is conducted on a sample of 2,816 European banks over the period 2011-2015 through a multivariate regression with panel data. The main evidence shows that a higher return on average assets and a greater soundness of the bank can be associated with a better loan quality. Furthermore, the results also demonstrate that system conditions can contribute to determining banks’ asset quality. Adverse cyclical conditions, resulting from a lower GDP growth and a higher unemployment rate, can generate a lower loan quality. Keywords: bank, doubtful loans, non-performing loans 1. Introduction The issue of banks’ loan quality has been broadly debated at the international level and has aroused great interest among experts in the financial industry, particularly with the worsening of the financial crisis. Studies have given particular attention to the relationships between bank-specific determinants and macroeconomic determinants and banks’ credit quality. In particular, the literature is oriented along two lines of analysis: one line focuses on the incidence of macroeconomic determinants only on the loan quality (Babouček and Jančar, 2005; Marcucci and Quagliarello, 2008; Nkusu, 2011), while the other additionally considers the impact of the macroeconomic components on banks’ credit (Salas and Saurina, 2002; Jiménez and Saurina, 2006; Boudriga et al., 2009; Makri et al., 2014). The connection between macroeconomic conditions and banks’ credit has been underlined by empirical evidence. Empirical studies demonstrate that favourable macroeconomic conditions, such as sustained economic growth, low unemployment and low interest rates, tend to be associated with a better banks’ loan quality. Similarly, bank-specific variables related to financial features and management policies are of great importance. This work belongs to the second line of research, as it aims to demonstrate the impact of bank-specific determinants and macroeconomic indicators on the impaired loans to gross loans ratio and on the doubtful loans to total assets ratio in the period following the outbreak of the sovereign debt crisis. Therefore, this study provides new empirical evidence on the phenomenon by focusing the attention on a difficult period characterized by a high incidence of non-performing loans in the European credit system. The empirical analysis is carried out on a sample of 2,816 banks, divided into 443 commercial banks, 1,403 cooperative banks and 970 savings banks based in Europe over the period 2011-2015 through a multivariate regression with panel data. The main results show a negative relationship between loan quality and the return on average assets and the total capital ratio, the latter being a proxy of the capital adequacy ratio. A higher return on average assets and a higher soundness of the banks can be associated with a better loan quality. The empirical evidence also demonstrates a negative relationship between the doubtful loans to total assets ratio and the bank size. Therefore, the results suggest that large banks have a greater ability to assess and manage doubtful loans than smaller banks have.