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Non-Performing Loans, Cost of Capital, and Lending Supply: Lessons from the Eurozone Banking Crisi

Gabriella Chiesa () and J. M. Mansilla-Fernández

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: This paper develops a theoretical model as a foundation of empirical analysis of the transmission channel of non-performing loans (NPLs) on bank cost of capital, credit and liquidity creation in the Eurozone. Empirical results confirm the model’s predictions and suggest that holding non-performing loans increases the cost of capital for banks in the short-term and the long-term. Moreover, the increased cost of capital reduces credit and liquidity creation, and the more so the less capitalized is the bank. This phenomenon is found to be economically more significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.

JEL-codes: G11 G21 G32 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-eec
Date: 2018-10
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:wp1124

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