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How do Banks Respond to NPLs? Evidence from the Euro Area

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Abstract

We study how asset quality deterioration influences the way Euro area banks adjust their balance sheets over 2010-2015. Findings from the fixed effect analysis report strong evidence of a negative correlation between asset quality and asset and lending growth. To explore the causality of the nexus, we exploit the 2014 ECB Asset Quality Review exercise in a diff-in-diff framework. We uncover a direct and negative effect of higher NPLs on banks' credit supply. Results are stronger for AQR banks plagued by high level of problem loans located in High-NPLs countries.

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  • Brunella Bruno & Immacolata Marino, 2018. "How do Banks Respond to NPLs? Evidence from the Euro Area," CSEF Working Papers 513, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:513
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    Keywords

    NPLs; non-performing loans; bank lending; asset quality; AQR;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises

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