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Stabilizing credit when nonperforming loans surge: The role of asset management companies

Author

Listed:
  • Martin, Reiner
  • O’Brien, Edward
  • Peiris, M. Udara
  • Tsomocos, Dimitrios P.

Abstract

When default losses elevate borrowing costs, expanding credit cannot stabilize the economy because default rates feed back to lending rates through bank balance sheets. Asset management companies (AMCs) break this loop by purchasing nonperforming loans at their long-run recovery values, thereby fixing the effective default rate that banks face. Government purchases of performing loans expand credit but leave this feedback intact. In a model calibrated to the eurozone, the AMC reduces quarterly default rates by 0.8 percentage points, lowers lending rates by 1.6 percentage points, and raises welfare by 0.2%. Government purchases crowd out bank deposits, contracting credit; default rates rise by 1.8 percentage points, lending rates increase by 1.2 percentage points, and welfare falls by 0.3%.

Suggested Citation

  • Martin, Reiner & O’Brien, Edward & Peiris, M. Udara & Tsomocos, Dimitrios P., 2026. "Stabilizing credit when nonperforming loans surge: The role of asset management companies," Journal of Economic Dynamics and Control, Elsevier, vol. 183(C).
    • Handle: RePEc:eee:dyncon:v:183:y:2026:i:c:s0165188925002155
    DOI: 10.1016/j.jedc.2025.105249
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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