Unpacking the impact of the capital requirement regulation on non-performing loan dynamics in EU banks

Inga Urbonaviciute

Finance Research Letters, 2025, vol. 75, issue C

Abstract: In the wake of the global financial crisis, an increasing trend in non-performing loans has led to significant risks to financial stability. The 2014 Capital Requirements Regulation was introduced to tackle systemic vulnerabilities in the banking sector by setting an 8% risk-weighted capital requirement. This study demonstrates that stricter capital regulation increases the costs of holding risky assets, especially non-performing loans. This regulatory intervention also reduced the growth in the non-performing loan ratio. The study shows that the effect’s magnitude depends on the bank’s size and the extent of the non-performing loans held before the regulation. Finally, the regulatory impact continued for four years, gradually diminishing post-implementation.

Keywords: Capital requirement regulation; Basel III; Non-performing loans; Empirical study (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325000753

DOI: 10.1016/j.frl.2025.106810

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