The economic impact of the NPLcoverage expectations in the euro area

Katarzyna Budnik (), Ivan Dimitrov, Johannes Groß, Piotr Kusmierczyk, Max Lampe, Gianluca Vagliano and Matjaž Volk

No 297, Occasional Paper Series from European Central Bank

Abstract: This paper looks at the macroeconomic impact of the two policies proposed by ECB Banking Supervision to tackle the high share of non-performing loans (NPLs) on the balance sheets of euro area banks. The first is the coverage expectations for new NPLs set out in the Addendum to the ECB’s NPL Guidance, which aim to prevent the build-up of new NPLs, and the second is the coverage expectations for legacy NPLs, which target the reduction of already existing stocks of NPLs. The impact assessment of the package is analysed via a semi-structural model, the Banking Euro Area Stress Test (BEAST). The coverage expectations for NPLs are found to be effective in reducing banks’ NPLs. The phase-in of the policies can temporarily reduce bank profitability owing to increased loan loss provisioning targets. However, over a longer time horizon, lower NPL ratios reduce uncertainty and enable banks to access cheaper funding in the markets, ultimately benefiting lending and output growth. Furthermore, the coverage expectations can also moderately but persistently reduce procyclicality in the banking system. JEL Classification: E37, E58, G21, G28

Keywords: banking sector; impact assessment; loan loss provisions; Non-performing loans; real-financial feedback mechanism; regulatory policy (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-fdg
Note: 1355359
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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