Benchmarking non-performing loans

Abstract

This paper provides a new perspective to evaluate the economic role played by banks in non-performing loans (NPLs) accumulation. We estimate benchmark NPL levels on the judicial inefficiency dimension, controlling for country- and bank-specific factors. To this aim, we first empirically establish whether judicial inefficiency is a key determinant of NPLs in the European banking system for the period 2006–2017. Using the dynamic-Generalized Method of Moments estimations, we show that higher contract enforcement inefficiency increases NPLs. Then, we estimate NPLs benchmark levels using a dose response function based on judicial inefficiency. Our results show that Norway, Sweden, and Italy performed better than the European countries, while Austria, Germany, Spain, Ireland, Cyprus, and Greece performed worse than the European mean. Our results have several policy implications.