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The dynamic effects of non-performing loans on banks’ cost of capital and lending supply in the Eurozone

Gabriella Chiesa () and José Manuel Mansilla-Fernández ()
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José Manuel Mansilla-Fernández: Public University of Navarre

Empirica, 2021, vol. 48, issue 2, No 6, 397-427

Abstract: Abstract This paper analyses the transmission channel from non-performing loans to the cost of capital, credit provision and liquidity creation in the banks of the Eurozone. The empirical results suggest that holdings of non-performing loans increase both the long- and short-term cost of capital for banks. Moreover, the less capitalized the bank, the greater the reduction in credit provision and liquidity creation due to the increased cost of capital. This phenomenon is found to be more economically significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.

Keywords: Cost of capital; Credit supply; Liquidity creation; NPLs; Sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: G11 G21 G32 H63 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10663-020-09475-5

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