Non-Performing Loan Disposals without Resolution

Using proprietary data on non-performing loan (NPL) transactions in China, we document that banks conceal NPLs in disposal transactions that are supposed to resolve NPLs. In these transactions, banks provide financing and retain the credit risks and debt collection obligations. Transaction prices contradict underlying credit risks, and the majority of NPL packages are re-sold at a premium to banks' non-government-owned borrowers, further supporting the concealment view. Banks under stricter regulation conceal NPLs more and engage in more illicit concealment. NPL-concealing banks increase zombie lending, suggesting that an ineffective resolution exacerbates credit misallocation.

Keywords: banking regulation, regulatory arbitrage, financial stability, Chinese economy

JEL Classification: G21, G23, G28, G18, G38

Suggested Citation: Suggested Citation

Charoenwong, Ben and Miao, Meng and Ruan, Tianyue, Non-Performing Loan Disposals without Resolution (November 8, 2021). Available at SSRN: https://ssrn.com/abstract=3662344 or http://dx.doi.org/10.2139/ssrn.3662344