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Bank supervision and non-performing loan cleansing

Yusuf Baskaya, José E. Gutiérrez, Jose Maria Serena Garralda and Serafeim Tsoukas
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José E. Gutiérrez: Banco de España
Serafeim Tsoukas: UNIVERSITY OF GLASGOW

No 2428, Working Papers from Banco de España

Abstract: This paper studies whether supervisory actions, namely provisioning guidelines on non-performing loans (NPLs), affect banks’ NPL cleansing and lending behaviour, as well as the real economy. Using the supervisory intervention announced by the European Central Bank in the first quarter of 2018 as a quasi-natural experiment, we show that banks disposed of old NPLs at a higher rate after the policy shift. Banks that were more heavily exposed to the policy tightened their lending standards, especially for risky firms. Furthermore, banks with stronger fundamentals were more keen on disposing NPLs and less restrained on lending. We also find that firms borrowing from banks affected by the supervisory actions experienced a decline in the growth rates of their total assets, investment, employment and sales. Our results highlight the importance of supervisory actions on NPL management, and potential beneficial effects on credit allocation.

Keywords: non-performing loans; loan loss provisioning rules; NPL resolution; credit supply; firm outcomes (search for similar items in EconPapers)
JEL-codes: E51 E58 G13 G21 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2024-09
New Economics Papers: this item is included in nep-cba, nep-eec and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2428

DOI: 10.53479/37596

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