Non-performing loans and bank lending behaviour

Abstract

This article empirically investigates whether the level of non-performing loans (NPLs) affects the bank lending behaviour using the bank-level data across 42 countries, spanning over the period from 2000 to 2017. We find a negative and statistically significant relationship between NPL and bank loan growth. This impact is not geographically restricted and is confirmed for the EU, non-EU, advanced, and emerging countries subsamples. We also examine the channels through which NPLs affect loan growth. Our results show that the association between NPL and loan growth is more pronounced for well-capitalized banks. We find no evidence in support of an effect of asset management companies on the negative association between NPLs and loan growth. In addition, our results are robust with respect to alternative measure of credit risk and different specifications.