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Unpacking the impact of the capital requirement regulation on non-performing loan dynamics in EU banks

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  • Urbonaviciute, Inga

Abstract

In the wake of the global financial crisis, an increasing trend in non-performing loans has led to significant risks to financial stability. The 2014 Capital Requirements Regulation was introduced to tackle systemic vulnerabilities in the banking sector by setting an 8% risk-weighted capital requirement. This study demonstrates that stricter capital regulation increases the costs of holding risky assets, especially non-performing loans. This regulatory intervention also reduced the growth in the non-performing loan ratio. The study shows that the effect’s magnitude depends on the bank’s size and the extent of the non-performing loans held before the regulation. Finally, the regulatory impact continued for four years, gradually diminishing post-implementation.

Suggested Citation

  • Urbonaviciute, Inga, 2025. "Unpacking the impact of the capital requirement regulation on non-performing loan dynamics in EU banks," Finance Research Letters, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325000753
    DOI: 10.1016/j.frl.2025.106810
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