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Non-Performing Loans: Causes, Effects and Remedies

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Marriott Philadelphia Downtown, Grand Ballroom Salon A
Hosted By: American Economic Association
  • Chair: Ralph de Haas, European Bank for Reconstruction and Development

Can Italy Grow Out of Its NPL Overhang? A Panel Threshold Analysis

Kamiar Mohaddes
,
University of Cambridge
Mehdi Raissi
,
International Monetary Fund
Anke Weber
,
International Monetary Fund

Abstract

This paper examines whether a tipping point exists for real GDP growth in Italy above which the ratio of non-performing loans (NPLs) to total loans falls significantly. Estimating a heterogeneous dynamic panel-threshold model with data on 17 Italian regions over the period 1997–2014, we provide evidence for the presence of growth-threshold effects on the NPL ratio in Italy. More specifically, we find that real GDP growth above 1.2 percent, if sustained for a number of years, is associated with a significant decline in the NPLs ratio. Achieving such growth rates requires decisively tackling long-standing structural rigidities and improving the quality of fiscal policy. Given the modest potential growth outlook, however, under which banks are likely to struggle to grow out of their NPL overhang, further policy measures are needed to put the NPL ratio on a firm downward path over the medium term.

NPLs in Europe: The Role of Systematic and Idiosyncratic Factors

Giovanni Cerulli
,
National Research Council of Italy
Vincenzo D’Apice
,
Italian Banking Association
Franco Fiordelisi
,
University of Rome III and Middlesex University London
Francesco Masala
,
Italian Banking Association

Abstract

Why did NPLs increase in some European countries and not in others? Focusing on a sample composed of large banks in the Euro area between 2006 and 2016, we show that greater stocks of NPLs are preceded by a period of higher levels of judicial inefficiency, economic stagnation and higher interest rates. We also estimate the response function that enables us to compare the actual and expected levels of NPLs, given the macro- and microeconomics conditions. We show that banks in Austria, Ireland, Cyprus, and Greece performed worse than a mean European bank would have done (on average, and during the period analyzed) given the same dose (i.e. days to enforce a contract). We find similar evidence using GDP growth and benchmark interest rates as doses.

Reducing Non-performing Loans: Stylized Facts and Economic Impact

Maria Balgova
,
University of Oxford
Alexander Plekhanov
,
European Bank for Reconstruction and Development
Marta Skrzypinska
,
University of Bristol

Abstract

Using newly collected data on non-performing loan (NPL) in more than 190 countries over 27 years as well as policies aimed at dealing with NPLs, this paper presents stylized facts about episodes of high NPLs and NPL reduction episodes. A combination of asset management companies and public funds made available for recapitalisation is shown to be more effective in terms of resolving NPLs. A typical policy-assisted NPL reduction episode starts with a sharp drop in the stock of NPLs while in later years a greater contribution to the decline in NPL ratio comes from revived credit growth. This profile enables us to focus on specific events – sharp drops in NPL ratios – and their aftermaths, using cases of persistently high NPLs as a control group. Using matching analysis, we estimate that reductions in NPLs are associated with extra growth in excess of 1.5 percentage points per annum over several years.

Looking Into the Black Box: The Causal Impact of NPLs on Credit Supply

Matteo Accornero
,
Bank of Italy
Piergiorgio Alessandri
,
Bank of Italy
Luisa Carpinelli
,
Bank of Italy

Abstract

We employ an extensive borrower-level dataset to study the influence of non-performing loans (NPLs) on the supply of bank credit to nonfinancial firms in Italy between 2009 and 2015. We use time-varying firm fixed effects to control for shifts in demand and changes in borrower characteristics, and exploit the supervisory interventions associated with the 2014 Asset Quality Review as a source of exogenous variations in the banks’ NPL ratios. We find that, although bad credit quality shocks can temporarily reduce the supply of credit, the NPL ratios per se have no impact on the banks’ lending behavior. The negative correlation between NPL ratios and credit growth in our data is generated instead by a simultaneous decline in firms’ health and demand for credit. High NPLs affect the composition rather than the volume of credit, inducing banks to move away from low-risk firms.
JEL Classifications
  • G2 - Financial Institutions and Services
  • G3 - Corporate Finance and Governance