Independent Variables

3.2.1 Unemployment Rate

In order to estimate the unemployment rate in Greece in terms of quarterly observations for the period 2005-2016, monthly data from Hellenic Statistic Authority were used to calculate the average unemployment of each quarter (expressed in basis points). Not seasonal adjusted values of Unemployment Rate were used in order to take into consideration the actual quarterly effect of the change of unemployment on the performance of Banking Sector.

Figure 3. 2 Unemployment Rate in Greece 2005-2016

Unemployment rate is affected by the economic conditions of a country but as well has its impact on the economic environment. High unemployment rate of period examined is expected to cause inability of loan repayment on behalf of the borrower, increased non performing exposures and reduction of savings due to decreased individual income. All the above influence NII of Banking Sector and it is interesting to investigate the accurate effect.

3.2.2 Greek Market Deposits Balance

In order to consider the Deposits Balance of Greek Market as quarterly observations for the period 2005-2016, monthly data extracted from Bank of Greece were used to calculate the average Greek Market Deposits Balance of each quarter (expressed in € bn).

Figure 3. 3 Greek Market Deposits 2005-2016

The change of market deposits affects the profitability of Banks since it has an impact on the expense paid by banks depending on volumes and of course in periods of reduction of Deposits, banks are forced to find other sources of funding with, possibly, different cost.

3.2.3 Greek Market Loans Balance

In order to consider the Loans Balance of Greek Market as quarterly observations for the period 2005-2016, monthly data derived from Bank of Greece were used to calculate the average Greek Market Loans Balance of each quarter (expressed in € bn). Since the scope of the research was to connect Profitability of Banks with growth of lending, market balances were adjusted for loans write-offs in order to depict market evolution in terms of expansion and not distorted by reductions in balances due to write-offs.

Figure 3. 4 Greek Market Loans 2005-2016

Figure 3. 5 Greek Market Loans adjusted for write-offs 2005-2016

Loans Volumes of Greek Market and its evolution involves directly the income of Greek Banking Sector, since lending is the main banking activity. Augmenting income for banks is expected in periods of loans expansion and the opposite movement for the profitability of banks in periods of deleverage of the market.

3.2.4 Rate of 10 year Greek Government Bond

In order to estimate the average rate of 10-year GGB (expressed in basis points) in terms of quarterly observations for the period 2005-2016, daily data from Bank of Greece and financial web-site gr.investing.com were used.

Figure 3. 6 10Y Greek Government Bond Rate 2005-2016

Cost of lending for Greek Government may affect in several manners the income and the profitability of Greek Banks. The immediate impact for banks is the increased income as holders of Government Bonds, earning augmented interest income. But, increased cost of lending for a Public Sector indicates instability of economy, degradation of its trustworthiness and deterioration of the economic environment with severe effects in the

profitability of banks such as raised cost of their funding sources and increase of non performing exposures. The rate of 10-year Greek Government Bond approached very high levels during the period examined (up to almost 32%), depicting the exclusion of Greece from any sort of funding and the financial markets.

3.2.5 Gross Domestic Product (GDP)

In order to estimate the amount of GDP (expressed in € bn) in terms of quarterly observations for the period 2005-2016, quarterly data from Hellenic Statistic Authority were used in constant terms with reference base the year 2010.

Figure 3. 7 Gross Domestic Product Evolution 2005-2016

The evolution of Gross Domestic Product of a country influences the performance of banks since it is a reliable indicator of the condition of the economic environment in which banks activate. The quarterly data of GDP for Greece show that, during the debt crisis, Greek Economy lost significant proportion of production.

3.2.6 Consumer Prices Index (CPI)

In order to estimate the average CPI in terms of quarterly observations for the period 2005- 2016, monthly data from Hellenic Statistic Authority were used with reference base the year 2009 (CPI=100 for the year 2009).

Figure 3. 8 Consumer Prices Index (CPI) 2005-2016

From 2005, it is clear, as shown in the above figure, that CPI indicates that cost of living has become more expensive during the years, noticing a fall during the years of financial crisis.

3.2.7 Trade Balance

In order to consider the amount of Trade Balance (expressed in € bn) as quarterly observations for the period 2005-2016, quarterly data from Hellenic Statistic Authority were used.

Figure 3. 9 Trade Balance 2005-2016

As we can notice in the above figure, the trade balance (exports minus imports) followed a rational trend according to the economic conditions. In the period of economic growth, 2005-2009, an increased deficit of trade balance is presented since imports are greater than exports but, during the recession period, this deficit is reduced. It is interesting to discover if trade balance has any impact on the performance of Greek Banks and especially on NIM.

3.2.8 Selection of Independent Variables

From the above variables examined from their association with Net Interest Margin, Unemployment Rate, Deposits and Loans Balances of Greek Market and the rate of 10-year Greek Government Bond were selected to be tested thoroughly in the research since the rest independent variables were rejected in initial tests (analysis in Chapter 4.5).