NPLs and resource allocation in crisis and post crisis years: evidence from European banks

We analyze the role of banks' loan quality in explaining lending patters in Europe before and after the onset of the Euro sovereign debt crisis. We studied the growth of total gross loans and, separately, we examined banks’ asset composition by looking at corporate and residential mortgage loan over total asset ratios, as well as at the share of government bonds over total assets. Although differences in the definition of NPLs as well in provisioning practices make it difficult the comparison across banks and countries, our results suggest that poor loan quality, capitalization, and loan loss provisioning matters in explaining asset allocation strategies of banks in crisis period. We uncovered significant differences across banks from distressed countries, relative to banks from countries with a sounder fiscal position.