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How Do Banks Respond to Non-Performing Loans?

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Abstract

We exploit the first European Central Bank's Asset Quality Review as a quasi-experiment to investigate the effect on banks' balance sheets of a shock to Non-Performing Loans (NPLs). We found that the banks included in the review with higher unexpected changes to their NPLs, deleveraged and reduced their lending more than non-reviewed banks. The effect is non-linear and is stronger among reviewed banks located in high-NPL countries. The banks affected the most were undercapitalised and unprofitable, suggesting that NPLs influence the credit supply via a capital/profitability channel.

Suggested Citation

  • Brunella Bruno & Immacolata Marino, 2018. "How Do Banks Respond to Non-Performing Loans?," CSEF Working Papers 513, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 30 Jul 2021.
  • Handle: RePEc:sef:csefwp:513
    Note: A previous version has been circulated under the title “How Banks Respond to NPLs? Evidence from the Euro Area".
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    Cited by:

    1. Alessi, Lucia & Bruno, Brunella & Carletti, Elena & Neugebauer, Katja, 2019. "What drives bank coverage ratios: Evidence from the euro area," Working Papers 2019-14, Joint Research Centre, European Commission (Ispra site).

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    More about this item

    Keywords

    Banks; asset quality; NPLs; credit supply.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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