What drives bank coverage ratios: Evidence from the euro area

Lucia Alessi, Brunella Bruno (), Elena Carletti () and Katja Neugebauer
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Elena Carletti: Bocconi University

No 2019-14, JRC Working Papers in Economics and Finance from Joint Research Centre, European Commission

Abstract: We analyse micro and macro drivers of coverage ratios in a cross–country sample of euro area banks. Among the former, we find that coverage ratios increase with the reliance on deposit funding and when asset quality is very poor. Among the latter, coverage ratios increase with GDP growth and with more stringent supervision and macro–prudential policies, as well as with deeper NPL secondary markets. Finally, we find evidence of peer imitation behaviour, as banks with below country average coverage ratios increase coverage ratios to catch up with their peers. As for the prevalent mechanism, banks tend to enhance coverage ratios primarily by increasing loan loss reserves rather than by resolving NPLs.

Keywords: loan loss reserves; non–performing loans; loan loss coverage (search for similar items in EconPapers)
JEL-codes: G21 G28 M41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-08
New Economics Papers: this item is included in nep-ban and nep-eec
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Published by Publications office of the European Union, 2019

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Persistent link: https://EconPapers.repec.org/RePEc:jrs:wpaper:201914

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