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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 European Central Bank's Asset Quality Review as a quasi-experiment to investigate the effect on banks' balance sheets of a shock to Non-Performing Loans (NPLs). We found that the banks included in the review with higher unexpected changes to their NPLs, deleveraged and reduced their lending more than non-reviewed banks. The effect is non-linear and is stronger among reviewed banks located in high-NPL countries. The banks affected the most were undercapitalised and unprofitable, suggesting that NPLs influence the credit supply via a capital/profitability channel.

Keywords: Banks; asset quality; NPLs; credit supply. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2018-11-09, Revised 2021-07-30
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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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:513

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