How do non-performing loans evolve along the economic cycle? The role of macroeconomic conditions and legal efficiency

Abstract

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.

Beteiligte Institutionen

Die Hauptstandorte vom TRR 266 sind die Universität Paderborn (Sprecherhochschule), die HU Berlin und die Universität Mannheim. Alle drei Standorte sind seit vielen Jahren Zentren für Rechnungswesen- und Steuerforschung. Hinzu kommen Wissenschaftler der LMU München, der Frankfurt School of Finance and Management, der WHU – Otto Beisheim School of Management, der ESMT Berlin, der Goethe-Universität Frankfurt und der Carl von Ossietzky Universität Oldenburg, die die gleiche Forschungsagenda verfolgen.