Credit Deepening and Bank Asset Quality: Dynamic Early-Warning Evidence from 58 Countries

This study examines whether the accumulated stock of private credit provides early-warning information for subsequent deterioration in banking-sector asset quality. It combines annual Passport banking indicators with World Development Indicators for 58 countries over 2010–2024; the preferred sample contains 746 country-year observations. A second-order dynamic fixed-effects model links log(1 + NPL) to lagged private credit to GDP, real credit growth, lending rates, bank capital, GDP growth, inflation, and unemployment. Its preferred coefficient is 0.00377, implying that a 10-percentage-point increase in private credit to GDP is associated with approximately 0.15 percentage points more NPLs one year later at the sample median. On a strictly common 609-observation sample, the credit-depth coefficients at one-, two-, and three-year horizons are 0.00501, 0.00960, and 0.01266; a stacked country-clustered Wald test rejects equality, although these are horizon-specific predictive projections rather than cumulative causal effects. Lending rates and unemployment are positive, whereas annual credit growth and capital ratios are not robust predictors. Pooled interactions do not reject equal slopes across broad country partitions. System GMM passes conventional tests but violates a persistence-bound credibility check. The evidence therefore supports an early-warning interpretation, not a causal claim.