Abstract— This paper uses probit and ordered probit methods to examine the impact of banks’ policies in terms of cost efficiency, capitalization, liquidity, activity diversification, credit growth and profitability on the loan quality in the Tunisian banking sector after controlling for the effects of firm-specific characteristics and macroeconomic conditions. Using a data set with detailed information for more than 9,000 firms comprising the portfolios of the ten largest Tunisian banks, we show that banks which are cost inefficient, low capitalized and illiquid are more likely to have a lower quality of loans. However, activity diversification, bank size and profitability do not seem to offer an important contribution in explaining the evolution of loan quality. Finally, our findings highlight the importance of taking into account firm-specific characteristics and macroeconomic developments when assessing the loan quality of banks from a financial stability perspective.
Keywords— bank specific factors, firm specific factors, loan quality, ordered probit, probit.
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