Cover Your Assets: Non-Performing Loans and Coverage Ratios in Europe
Economic Policy, 2021;, eiab013, https://doi.org/10.1093/epolic/eiab013
44 Pages Posted: 28 Oct 2021
Date Written: September 13, 2021
We analyse the determinants of coverage ratios and their components [nonperforming loans (NPLs) and loss loan reserves] in a large sample of European banks. We find that bank-specific factors, particularly credit risk variables (including forward-looking indicators) and capitalization, matter the most. Coverage ratios adjust insufficiently as asset quality deteriorates, except in high-NPL banks. Capitalization has a positive effect on coverage ratio, pointing to a complementarity between the two buffers. At the country level, specific macroprudential levers and developing NPL secondary markets enhance coverage ratios. Our findings emphasize the importance of micro oversight and call for more stringent macro policies in high- NPL countries.
Keywords: non-performing loan, loan loss coverage, Europe, COVID-19
JEL Classification: G21, G28, M41
Suggested Citation: Suggested Citation