Bad Bank Resolutions and Bank Lending

41 Pages Posted: 12 Feb 2020

See all articles by Michael Brei

Michael Brei

Université de Lille

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Marcella Lucchetta

Ca Foscari University of Venice

Bruno Maria Parigi

University of Padova - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2020

Abstract

The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks' lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000-16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank's assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank.

Keywords: bad banks, resolutions, lending, non-performing loans, rescue packages, recapitalisations

JEL Classification: E44, G01, G21

Suggested Citation

Brei, Michael and Gambacorta, Leonardo and Lucchetta, Marcella and Parigi, Bruno Maria, Bad Bank Resolutions and Bank Lending (January 24, 2020). BIS Working Paper No. 837. Available at SSRN: https://ssrn.com/abstract=3535900

Michael Brei (Contact Author)

Université de Lille ( email )

Cité Scientifique
Villeneuve-d'Ascq, 59650
France

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Marcella Lucchetta

Ca Foscari University of Venice ( email )

Venice
Italy

Bruno Maria Parigi

University of Padova - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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