Hidden Non-Performing Loans in China
75 Pages Posted: 12 Feb 2021 Last revised: 10 Nov 2021
Date Written: November 8, 2021
We study non-performing loan (NPL) resolution using proprietary data on NPL transactions in China. Rather than representing orderly NPL resolution, the transactions appear to reflect banks concealing non-performing assets from regulators as (i) transaction prices do not reflect underlying credit risks; (ii) banks fund the NPL transactions and remain responsible for debt collection, and (iii) after two years, over 95% of NPL packages are re-sold at a profit to bank borrowers who do not appear to be NPL resolution specialists. Our findings suggest banks remain at least partially exposed to the NPLs that were removed from their balance sheets.
Keywords: banking regulation, regulatory arbitrage, financial stability, Chinese economy
JEL Classification: G21, G23, G28, G18, G38
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