Credit Risk Externalities: Evidence from European Non-Performing Loan Spillovers

Michail Giannoulakis, Stelios Giannoulakis and Steven Ongena
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Michail Giannoulakis: University of Greenwich
Stelios Giannoulakis: Athens University of Economics and Business; Hellenic Parliamentary Budget Office
Steven Ongena: University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

No 26-45, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper examines ex-post credit-risk externalities in Europe by quantifying crosscountry spillovers in non-performing loan (NPL) dynamics across 30 European countries over 2010Q1-2022Q2. Using a multilateral connectedness framework, we document three facts. First, spillovers are substantial: the static total connectedness index is 77.51%, indicating strong system-wide interdependence in realised credit risk. Second, NPL spillover directions are asymmetric: 18 countries are net receivers and 12 are net transmitters, where network evidence reveals a hub-and-periphery structure in which several highly connected nodes are not the economies with persistently high NPL ratios or acute domestic stress. Third, interconnectedness is persistent: dynamic rolling estimates remain elevated (typically 86-92%) and are comparatively smoother during 2019-2021, consistent with COVID-19 pandemic-era interventions dampening short-run fluctuations without dampening spillovers. Panel evidence links spillover roles to trade openness, GDP growth, and supervisory capacity: more open economies tend to be stronger net transmitters, while higher GDP growth and stronger supervisory capacity are associated with weaker net transmission.

Keywords: non-performing loans (NPLs); credit risk spillovers; financial interconnectedness; Europe; systemic risk (search for similar items in EconPapers)
JEL-codes: C32 F36 G01 G15 G21 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2026-06
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