The determinants of banks' credit risk: Review of the literature and future research agenda

Banks' credit risk, mostly conveyed by the level of non-performing loans (NPLs) and considered as a prominent threat to the banking sector stability, has been widely discussed among researchers and policymakers. Given the growing body of literature on this topic, this paper aims to provide a structured review of literature on the determinants of NPLs with a focus on the current dynamics of the field. This study discusses the main theories that shaped the debate on NPLs and their bank-specific, macroeconomic and industry-related determinants. A thorough understanding of these latter would enable policymakers, regulators and bank managers to anticipate banks' failures and, academicians to advance their research. To facilitate further knowledge in this field, this paper reviews 69 studies published between 1987 and 2019 in 40 peer-reviewed journals. We argue that despite the extensive empirical and theoretical work accomplished over the last decades, the issue of credit risk remains an unsolved line of inquiry, which leaves ample room for critical debates. Beside mapping the emerging discourse on this area, this study proposes a promising future research agenda to guide research advancement.