Stabilizing credit when nonperforming loans surge: the role of asset management companies

Reiner Martin, O’Brien, Edward, Udara Peiris and Dimitrios P. Tsomocos

No 3195, Working Paper Series from European Central Bank

Abstract: When default losses elevate borrowing costs, expanding credit cannot stabilize the economy because default rates feedback 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%. JEL Classification: E44, G01, G21, G28

Keywords: asset management companies; bank balance sheets; credit stabilization; endogenous default; nonperforming loans (search for similar items in EconPapers)
Date: 2026-02
Note: 339083
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263195

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