Do non-performing loans matter for bank lending and the business cycle in euro area countries?

• Published in: Journal of applied economics Vol. 25; no. 1; pp. 1050 - 1080
• Main Authors: Huljak, Ivan, Martin, Reiner, Moccero, Diego, Pancaro, Cosimo
• Format: Journal Article
• Language: English
• Published: Abingdon Routledge 31-12-2022; Taylor & Francis Ltd; Taylor & Francis Group
• Subjects: Banking industry; Bayesian analysis; Business cycles; Central banks; Competition; Debt restructuring; Economic activity; Economic crisis; Euro area countries; Eurozone; Foreign exchange rates; hierarchical priors; Hypotheses; Interest rates; International finance; Loans; Macroeconomics; National banks; non-performing loans; panel Bayesian VAR; Prices; Ratios; Variables
• ISSN: 1514-0326; 1667-6726
• DOI: 10.1080/15140326.2022.2094668

We estimate the impact of changes in non-performing loan (NPL) ratios on aggregate banking sector variables and the macroeconomy by estimating a panel Bayesian VAR model for twelve euro area countries. The main findings are as follows: i) An impulse response analysis shows that an exogenous increase in the change in NPL ratios tends to depress bank lending volumes, widens bank lending spreads and leads to a fall in real GDP growth and residential real estate prices; ii) A forecast error variance decomposition shows that shocks to the change in NPL ratios explain a relatively large share of the variance of the variables in the VAR, particularly for countries that experienced a large increase in NPL ratios during the recent crises; and iii) A three-year structural out-of-sample scenario analysis suggests that reducing banks' NPL ratios can produce significant benefits in terms of improved macroeconomic and financial conditions.