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Bank supervision and non-performing loan cleansing

Author

Listed:
  • Soner Baskaya

    (UNIVERSITY OF GLASGOW)

  • José E. Gutiérrez

    (Banco de España)

  • José María Serena

    (Banco de España)

  • Serafeim Tsoukas

    (UNIVERSITY OF GLASGOW)

Abstract

This paper studies whether supervisory actions, namely provisioning guidelines on non-performing loans (NPLs), affect banks’ NPL cleansing and lending behaviour, as well as the real economy. Using the supervisory intervention announced by the European Central Bank 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 shift. 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 beneficial effects on credit allocation.

Suggested Citation

  • Soner Baskaya & José E. Gutiérrez & José María Serena & Serafeim Tsoukas, 2024. "Bank supervision and non-performing loan cleansing," Working Papers 2428, Banco de España.
    • Handle: RePEc:bde:wpaper:2428
    DOI: https://doi.org/10.53479/37596
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    References listed on IDEAS

    as
    1. Puriya Abbassi & Rajkamal Iyer & José-Luis Peydró & Paul E. Soto, 2020. "Stressed Banks? Evidence from the Largest-Ever Supervisory Review," Working Papers 1178, Barcelona School of Economics.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    non-performing loans; loan loss provisioning rules; NPL resolution; credit supply; firm outcomes;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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