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How Do Banks Respond to Non-Performing Loans?

Brunella Bruno () and Immacolata Marino ()

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

Abstract: We exploit the first ECB Asset Quality Review (AQR) as a quasi-experiment to investigate the effect of changes in non-performing loans (NPLs) on banks' balance sheets. We show that AQR banks with higher unexpected changes to their NPLs deleverage and reduce lending more than non-AQR banks. The effect is non-linear, and stronger in AQR banks located in high-NPL countries. If we focus only on AQR banks, we find that larger NPL adjustments have negative compositional effects on lending in the sample of reviewed banks from low-NPL countries, and negative size effects in the sample from high-NPL countries.

Keywords: NPLs; asset quality; bank lending; AQR (search for similar items in EconPapers)
JEL-codes: G21 G01 (search for similar items in EconPapers)
Date: 2018-11-09, Revised 2020-05-02
New Economics Papers: this item is included in nep-ban and nep-eec
Note: A previous version has been circulated under the title “How Banks Respond to NPLs? Evidence from the Euro Area".
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