Credit Risk Externalities: Evidence from European Non-Performing Loan Spillovers

This paper examines ex-post credit-risk externalities in Europe by quantifying crosscountry spillovers in non-performing loan (NPL) dynamics across 30 European countries over 2010Q1-2022Q2. Using a multilateral connectedness framework, we document three facts. First, spillovers are substantial: the static total connectedness index is 77.51%, indicating strong system-wide interdependence in realised credit risk. Second, NPL spillover directions are asymmetric: 18 countries are net receivers and 12 are net transmitters, where network evidence reveals a hub-and-periphery structure in which several highly connected nodes are not the economies with persistently high NPL ratios or acute domestic stress. Third, interconnectedness is persistent: dynamic rolling estimates remain elevated (typically 86-92%) and are comparatively smoother during 2019-2021, consistent with COVID-19 pandemic-era interventions dampening short-run fluctuations without dampening spillovers. Panel evidence links spillover roles to trade openness, GDP growth, and supervisory capacity: more open economies tend to be stronger net transmitters, while higher GDP growth and stronger supervisory capacity are associated with weaker net transmission.