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Evergreening in the Euro Area: Facts and Explanation

Author

Listed:
  • Sven Steinkamp

    () (Osnabrueck University)

  • Aaron Tornell

    () (University of California, Los Angeles)

  • Frank Westermann

    () (Osnabrueck University)

Abstract

Since the beginning of the financial crisis in 2007/8, new lending in the Euro-Area has slowed sharply and the old loans experienced “evergreening,” i.e. bad loans have been rolled over rather than being liquidated. Even though ameliorating evergreening is key to promote lending for new investment projects and growth, no systematic evergreening measures exist. In this paper, we propose a new cross-country evergreening index and develop a model to explain why evergreening may reflect the incentives of regulators to forebear. Our evergreening index is based on a survey we designed, and was administered by the ifo institute to about 1,000 experts in over 80 countries. We bring the model to the data using a heteroscedastic probit model and find that evergreening is higher in: (i) Euro-Area countries than in the rest of the world; (ii) in countries facing bank distress; and (iii) is highest in countries which experience banking distress and are members of the Euro Area. These results are consistent with our theoretical model.

Suggested Citation

  • Sven Steinkamp & Aaron Tornell & Frank Westermann, 2018. "Evergreening in the Euro Area: Facts and Explanation," Working Papers 113, Institute of Empirical Economic Research, Osnabrueck University.
  • Handle: RePEc:iee:wpaper:wp0113
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    File URL: http://web.fb9.uni-osnabrueck.de/repec/iee/wpaper/15314129_WP_113.pdf
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    References listed on IDEAS

    as
    1. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
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    4. Sven Steinkamp & Aaron Tornell & Frank Westermann, 2017. "The Euro Area’s Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening?," Working Papers 107, Institute of Empirical Economic Research, Osnabrueck University, revised 06 Oct 2017.
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    More about this item

    Keywords

    Evergreening; Central bank credit; Survey data; Forbearance;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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