Non-Performing Loans: Causes, Effects and Remedies
Friday, Jan. 5, 2018 2:30 PM - 4:30 PM
- Chair: Ralph de Haas, European Bank for Reconstruction and Development
NPLs in Europe: The Role of Systematic and Idiosyncratic Factors
AbstractWhy did NPLs increase in some European countries and not in others? Focusing on a sample composed of large banks in the Euro area between 2006 and 2016, we show that greater stocks of NPLs are preceded by a period of higher levels of judicial inefficiency, economic stagnation and higher interest rates. We also estimate the response function that enables us to compare the actual and expected levels of NPLs, given the macro- and microeconomics conditions. We show that banks in Austria, Ireland, Cyprus, and Greece performed worse than a mean European bank would have done (on average, and during the period analyzed) given the same dose (i.e. days to enforce a contract). We find similar evidence using GDP growth and benchmark interest rates as doses.
Reducing Non-performing Loans: Stylized Facts and Economic Impact
AbstractUsing newly collected data on non-performing loan (NPL) in more than 190 countries over 27 years as well as policies aimed at dealing with NPLs, this paper presents stylized facts about episodes of high NPLs and NPL reduction episodes. A combination of asset management companies and public funds made available for recapitalisation is shown to be more effective in terms of resolving NPLs. A typical policy-assisted NPL reduction episode starts with a sharp drop in the stock of NPLs while in later years a greater contribution to the decline in NPL ratio comes from revived credit growth. This profile enables us to focus on specific events – sharp drops in NPL ratios – and their aftermaths, using cases of persistently high NPLs as a control group. Using matching analysis, we estimate that reductions in NPLs are associated with extra growth in excess of 1.5 percentage points per annum over several years.
Looking Into the Black Box: The Causal Impact of NPLs on Credit Supply
AbstractWe employ an extensive borrower-level dataset to study the influence of non-performing loans (NPLs) on the supply of bank credit to nonfinancial firms in Italy between 2009 and 2015. We use time-varying firm fixed effects to control for shifts in demand and changes in borrower characteristics, and exploit the supervisory interventions associated with the 2014 Asset Quality Review as a source of exogenous variations in the banks’ NPL ratios. We find that, although bad credit quality shocks can temporarily reduce the supply of credit, the NPL ratios per se have no impact on the banks’ lending behavior. The negative correlation between NPL ratios and credit growth in our data is generated instead by a simultaneous decline in firms’ health and demand for credit. High NPLs affect the composition rather than the volume of credit, inducing banks to move away from low-risk firms.
- G2 - Financial Institutions and Services
- G3 - Corporate Finance and Governance