How Do Non-Performing Loans Evolve along the Economic Cycle? The Role of Macroeconomic Conditions and Legal Efficiency
forthcoming at European Accounting Review
47 Pages Posted: 12 Nov 2021 Last revised: 25 Apr 2022
Date Written: April 25, 2022
We investigate the development of non-performing loans (NPL) held by European banks along the economic cycle. During the global financial crisis and the subsequent sovereign debt crisis, banks from all European countries experienced a substantial increase in NPLs. We find that these increases are mainly associated with macroeconomic determinants and characteristics of banks’ business models. Substantial differences across countries exist in the duration and efficiency of the NPL resolution after the crisis. We exploit cross-country and time-variant differences in insolvency and contract enforcement procedures to document that the outcome of NPL resolution is associated with the duration and the costs of insolvency and contract enforcement during the economic recovery phase. Our findings suggest that the design of a country’s legal regime can ensure a swift NPL resolution during the recovery phase while the build-up of NPLs during a crisis is mainly attributable to economic conditions.
Keywords: Non-performing loans, Legal efficiency, Financial institutions, International accounting, Bank regulation
JEL Classification: M41, M48, F34, G21, G28
Suggested Citation: Suggested Citation