HKC02 - Stabilizing Credit When Nonperforming Loans Surge: The Role of Asset Management Companies

Reiner Martin, Edward O'Brien, M. Udara Peiris and Dimitrios Tsomocos
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Reiner Martin: National Bank of Slovakia
Edward O'Brien: ECB
M. Udara Peiris: Department of Economics, Oberlin College, https://www.oberlin.edu/arts-and-sciences/departments/economics
Dimitrios Tsomocos: University of Oxford

No 2502, Oberlin College Kasper Economics and Business Working Papers Series from Oberlin College, Department of Economics

Abstract: When default losses elevate borrowing costs, expanding credit cannot stabilize the economy because default rates feed back to lending rates through bank balance sheets. Asset management companies (AMCs) break this loop by purchasing nonperforming loans at their long-run recovery values, thereby fixing the effective default rate that banks face. Government purchases of performing loans expand credit but leave this feedback intact. In a model calibrated to the eurozone, the AMC reduces quarterly default rates by 0.8 percentage points, lowers lending rates by 1.6 percentage points, and raises welfare by 0.2%. Government purchases crowd out bank deposits, contracting credit; default rates rise by 1.8 percentage points, lending rates increase by 1.2 percentage points, and welfare falls by 0.3%.

Keywords: Nonperforming Loans; Asset Management Companies; Credit Stabilization; Bank Balance Sheets; Endogenous Default (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 G28 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2025-12-07
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