Economics Seminar - Unloading NPLs, Unlocking credit? Evidence from the ECB provisioning Guidelines

Event Date: 6 March 2024

Speaker: Professor Soner Baskaya - Adam Smith Business School Glasgow

Time: 4-5:15pm

Location: CW404b

Contact: Dr Jonathan Norris jonathan.norris@strath.ac.uk

Abstract: "This paper studies whether supervisory actions, namely provisioning guidelines on non-performing loans (NPLs), affect banks' NPL disposal and lending behavior, as well as the real economy. Using the supervisory intervention announced by the ECB in the first quarter of 2018 as a quasi-natural experiment, we show that banks disposed of old NPLs at a higher rate after the policy. Banks that were more heavily exposed to the policy tightened their lending standards, especially for risky firms. Furthermore, banks with stronger fundamentals were more keen on disposing NPLs and less restrained on lending. We also find that firms borrowing from banks affected by the supervisory actions experienced a decline in the growth rates of their total assets, investment, employment, and sales. Our results highlight the importance of supervisory actions on NPL management, and potential side effects on credit allocation."

Published: 25 September 2024