Non-Performing Loans, Cost of Capital, and Lending Supply: Lessons from the Eurozone Banking Crisis

Quaderni - Working Paper DSE N° 1124

53 Pages Posted: 25 Oct 2018

See all articles by Gabriella Chiesa

Gabriella Chiesa

University of Bologna - Department of Economics

José Manuel Mansilla-Fernandez

Public University of Navarre

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2018

Abstract

This paper develops a theoretical model as a foundation of empirical analysis of the transmission channel of non-performing loans (NPLs) on bank cost of capital, credit and liquidity creation in the Eurozone. Empirical results confirm the model’s predictions and suggest that holding non-performing loans increases the cost of capital for banks in the short-term and the long-term. Moreover, the increased cost of capital reduces credit and liquidity creation, and the more so the less capitalized is the bank. This phenomenon is found to be economically more significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.

Keywords: Cost of capital, credit supply, liquidity creation, NPLs, sovereign debt crisis

JEL Classification: G11, G21, G32, H63

Suggested Citation

Chiesa, Gabriella and Mansilla-Fernandez, José Manuel, Non-Performing Loans, Cost of Capital, and Lending Supply: Lessons from the Eurozone Banking Crisis (October 1, 2018). Quaderni - Working Paper DSE N° 1124, Available at SSRN: https://ssrn.com/abstract=3259066 or http://dx.doi.org/10.2139/ssrn.3259066

Gabriella Chiesa (Contact Author)

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
40126 Bologna, 40126
Italy
+39-051-2095511 (Phone)
+39-051-2095510 (Fax)

HOME PAGE: http://www.dse.unibo.it/gchiesa/home.htm

José Manuel Mansilla-Fernandez

Public University of Navarre ( email )

Business Administration Department
Campus Arrosadia
Pamplona, Pamplona 31006
Spain

HOME PAGE: http://sites.google.com/site/josemanuelmansillafernandezphd/home

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