TY - JOUR

T1 - The effect of nonperforming loans on credit expansion: do capital and profitability matter? Evidence from European banks

AU - Thornton, John

AU - Di Tommaso, Caterina

PY - 2021/7

Y1 - 2021/7

N2 - We examine whether the effect of NPLs on bank credit growth differs depending upon the level of bank capital and profitability in a panel of up to 521 banks from 21 European countries. Our main finding is that there is a significant positive interaction effect of NPLs and bank capital and NPLs and profitability on the supply of bank credit. Thus, whether NPLs impede the monetary policy transmission mechanism depends substantially on whether or not banks are sufficiently capitalized and profitable. Policy actions aimed at reducing NPLs to sustain bank credit should protect bank capital and profitability if they are to be effective, including by supporting efforts that aim at returning NPLs to good standing.

AB - We examine whether the effect of NPLs on bank credit growth differs depending upon the level of bank capital and profitability in a panel of up to 521 banks from 21 European countries. Our main finding is that there is a significant positive interaction effect of NPLs and bank capital and NPLs and profitability on the supply of bank credit. Thus, whether NPLs impede the monetary policy transmission mechanism depends substantially on whether or not banks are sufficiently capitalized and profitable. Policy actions aimed at reducing NPLs to sustain bank credit should protect bank capital and profitability if they are to be effective, including by supporting efforts that aim at returning NPLs to good standing.

KW - European banks

KW - bank capital

KW - bank credit

KW - bank profitability

KW - non-performing loans

U2 - https://doi.org/10.1002/ijfe.2042

DO - https://doi.org/10.1002/ijfe.2042

M3 - Article

VL - 26

SP - 4822

EP - 4839

JO - International Journal of Finance and Economics

JF - International Journal of Finance and Economics

SN - 1099-1158

IS - 3

ER -