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The dynamic effects of non-performing loans on banks’ cost of capital and lending supply in the Eurozone

Author

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  • Gabriella Chiesa

    (University of Bologna)

  • José Manuel Mansilla-Fernández

    (Public University of Navarre)

Abstract

This paper analyses the transmission channel from non-performing loans to the cost of capital, credit provision and liquidity creation in the banks of the Eurozone. The empirical results suggest that holdings of non-performing loans increase both the long- and short-term cost of capital for banks. Moreover, the less capitalized the bank, the greater the reduction in credit provision and liquidity creation due to the increased cost of capital. This phenomenon is found to be more economically significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.

Suggested Citation

  • Gabriella Chiesa & José Manuel Mansilla-Fernández, 2021. "The dynamic effects of non-performing loans on banks’ cost of capital and lending supply in the Eurozone," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(2), pages 397-427, May.
  • Handle: RePEc:kap:empiri:v:48:y:2021:i:2:d:10.1007_s10663-020-09475-5
    DOI: 10.1007/s10663-020-09475-5
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    More about this item

    Keywords

    Cost of capital; Credit supply; Liquidity creation; NPLs; Sovereign debt crisis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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