IDEAS home Printed from https://ideas.repec.org/a/taf/eurjfi/v27y2021i7p613-634.html
   My bibliography  Save this article

Preventing the deterioration of bank loan portfolio quality: a focus on unlikely-to-pay loans

Author

Listed:
  • Doriana Cucinelli
  • Lorenzo Gai
  • Federica Ielasi
  • Arturo Patarnello

Abstract

This study examines determinants of: (a) new flows of unlikely-to-pay loans (UTPs), comparing them to determinants of bad loans; and (b) out-flows from UTPs to performing and bad loans. A novel panel data-set covering the period 2010–2016 is used to test hypotheses relating to lending policy, bank capitalization, bad management, and procyclical credit policy. Determinants identified by the existing literature on the wider category of all non-performing loans are in part confirmed for UTPs and in part rejected. The main findings show: (i) a positive relationship exists between bank capitalization and new flows of both UTPs and bad loans; (ii) reducing cost efficiency increases both new flows of UTPs and the worsening of UTPs towards bad loans; and (iii) having a specific unit/office to manage impaired loans increases flows from UTPs to performing loans, but does not decrease flows to bad loans. Our study is useful for banks seeking to prevent new impaired exposures, to accelerate the transition from UTPs to performing loans, and to prevent UTPs worsening to bad loans. The findings reveal the importance of sound and proactive UTP management, given the need for banks to increase provisions for covering UTPs in the near future.

Suggested Citation

  • Doriana Cucinelli & Lorenzo Gai & Federica Ielasi & Arturo Patarnello, 2021. "Preventing the deterioration of bank loan portfolio quality: a focus on unlikely-to-pay loans," The European Journal of Finance, Taylor & Francis Journals, vol. 27(7), pages 613-634, May.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:7:p:613-634
    DOI: 10.1080/1351847X.2020.1830143
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/1351847X.2020.1830143
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/1351847X.2020.1830143?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Abraham Nyebar & Adefemi A. Obalade & Paul-Francois Muzindutsi, 2024. "The Effectiveness of Credit Risk Mitigation Strategies Adopted by Ghanaian Commercial Banks in Agricultural Finance," JRFM, MDPI, vol. 17(9), pages 1-14, August.
    2. Cicchiello, Antonella Francesca & Cotugno, Matteo & Perdichizzi, Salvatore & Torluccio, Giuseppe, 2022. "Do capital buffers matter? Evidence from the stocks and flows of nonperforming loans," International Review of Financial Analysis, Elsevier, vol. 84(C).
    3. Pancotto, Livia & ap Gwilym, Owain & Williams, Jonathan, 2024. "The evolution and determinants of the non-performing loan burden in Italian banking," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:27:y:2021:i:7:p:613-634. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/REJF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.