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How do Banks Respond to NPLs? Evidence from the Euro Area

Brunella Bruno () and Immacolata Marino ()
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Brunella Bruno: Università Bocconi

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We study how asset quality deterioration influences the way Euro area banks adjust their balance sheets over 2010-2015. Findings from the fixed effect analysis report strong evidence of a negative correlation between asset quality and asset and lending growth. To explore the causality of the nexus, we exploit the 2014 ECB Asset Quality Review exercise in a diff-in-diff framework. We uncover a direct and negative effect of higher NPLs on banks' credit supply. Results are stronger for AQR banks plagued by high level of problem loans located in High-NPLs countries.

Keywords: NPLs; non-performing loans; bank lending; asset quality; AQR (search for similar items in EconPapers)
JEL-codes: G20 G21 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-eec
Date: 2018-11-09
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