Non-Performing Loans, Cost of Capital, and Lending Supply: Lessons from the Eurozone Banking Crisis

Abstract

This paper develops a theoretical model as a foundation of empirical analysis of the transmission channel of non-performing loans (NPLs) on bank cost of capital, credit and liquidity creation in the Eurozone. Empirical results confirm the model's predictions and suggest that holding non-performing loans increases the cost of capital for banks in the short-term and the long-term. Moreover, the increased cost of capital reduces credit and liquidity creation, and the more so the less capitalized is the bank. This phenomenon is found to be economically more significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.creation to the bank's cost of capital, which means that the lending volume granted by banks endowed with relatively higher levels of capital is less affected by changes in investors' required return on bank equity holdings.Importantly, taking into consideration that European periphery country banks accumulated comparatively greater levels of NPLs than European core country banks, we estimate separately the transmission channel for both 'Europes'. We find that this phenomenon is economically more significant for banks operating in the Eurozone periphery countries than for those in the Eurozone core countries.The robustness of our results is validated by repeating the experiment for a sub-sample of German banks. Note the reader that German banks were commonly considered to be the safest ones in the Eurozone, because they held the lowest levels of NPLs compared to banks in other countries, and Germany has been more immune from macro/crisis shocks. Since we obtain qualitatively similar estimates for German banks, we draw the conclusion that our results are not driven by hidden common factors. Finally, the Granger predictability test confirms the uniqueness of the direction of the transmission channel. These results confirm the theoretical foundations of the transmission channel under investigation.

Analisis Pengaruh Faktor-Faktor Fundamental Kinerja Bank Dan Makro Ekonomi Terhadap Stabilitas Perbankan Di Indonesia

“…NPL (Non Performing Loan) dijadikan alat ukur rasio kualitas aset, karena semakin tinggi nilai NPL mencerminkan semakin buruk kualitas kredit bank yang menyebabkan jumlah kredit bermasalah semakin besar dan bank mengalami kerugian. Selain itu, kinerja bank dapat dinilai dari kecukupan modal yang menjadi hal penting dalam berdirinya suatu bank, karena menunjukkan kemampuan bank dalam menyediakan dana yang digunakan sebagai cadangan untuk mengatasi kerugian sebagai akibat dari aktiva yang berisiko seperti penyaluran kredit, penyertaan surat berharga, maupun tagihan pada bank lain yang harus dibiayai oleh modal sendiri (Chiesa & Mansilla-Fernandez, 2018;Ozili, 2019;Yang, 2017).…”