We study how deterioration in asset quality influenced the way euro area banks adjusted their balance sheets in 2010-2015. Fixed-effect analysis finds strong evidence of a negative correlation between asset quality and the growth in assets and lending. To determine the direction of causality, we exploit the 2014 ECB Asset Quality Review exercise in a diff-in-diff framework. We uncover a strong direct negative effect of higher NPLs on banks' credit supply. AQR banks plagued by high levels of problem loans reacted more sharply than reviewed banks with a low level of troubled assets.

How banks respond to NPLs. Evidence from the Euro area

Bruno, Brunella;
2018

Abstract

We study how deterioration in asset quality influenced the way euro area banks adjusted their balance sheets in 2010-2015. Fixed-effect analysis finds strong evidence of a negative correlation between asset quality and the growth in assets and lending. To determine the direction of causality, we exploit the 2014 ECB Asset Quality Review exercise in a diff-in-diff framework. We uncover a strong direct negative effect of higher NPLs on banks' credit supply. AQR banks plagued by high levels of problem loans reacted more sharply than reviewed banks with a low level of troubled assets.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/4018743
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