What Factors Affect Non-Performing Loans During Macroeconomic and Financial Turbulence? Evidence from Italy

Abstract

This paper examines the macroeconomic and bank-specific variables that affect non-performing loans (NPLs) in Italy. Considering different hypotheses, I find that macroeconomic variables have a limited effect on NPLs even during a period of extreme macroeconomic and financial conditions. Quality and risk attitude of management are more relevant factors. I also find evidence in favor of the presence of a too-big-too-fail problem, which increases moral hazard attitude. Conversely, banks small-enough-to-fail are more inclined to follow procyclical lending policy in the long-run. For both small and large institutions, the relationship between banks and borrowers helps in reducing NPLs. Finally, I find that cooperative banks seem to take fewer risks.

Keywords: Non-performing loans, Moral hazard, Lending technologies, Cooperative banks, Too-big-too-fail problem

JEL Classification: G21, C23