Do non-performing loans matter for bank lending and the business cycle in euro area countries?

Ivan Huljak, Reiner Martin, Diego Moccero and Cosimo Pancaro

Journal of Applied Economics, 2022, vol. 25, issue 1, 1050-1080

Abstract: We estimate the impact of changes in non-performing loan (NPL) ratios on aggregate banking sector variables and the macroeconomy by estimating a panel Bayesian VAR model for twelve euro area countries. The main findings are as follows: i) An impulse response analysis shows that an exogenous increase in the change in NPL ratios tends to depress bank lending volumes, widens bank lending spreads and leads to a fall in real GDP growth and residential real estate prices; ii) A forecast error variance decomposition shows that shocks to the change in NPL ratios explain a relatively large share of the variance of the variables in the VAR, particularly for countries that experienced a large increase in NPL ratios during the recent crises; and iii) A three-year structural out-of-sample scenario analysis suggests that reducing banks’ NPL ratios can produce significant benefits in terms of improved macroeconomic and financial conditions.

Date: 2022
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Working Paper: Do non-performing loans matter for bank lending and the business cycle in euro area countries? (2020)
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DOI: 10.1080/15140326.2022.2094668

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