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

See all articles by Alessi Lucia

Alessi Lucia

Joint Research Center of the European Commission; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Brunella Bruno

Bocconi University - Department of Finance

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Katja Neugebauer

Systemic Risk Centre - LSE

Isabella Wolfskeil

Bocconi University

Date Written: September 13, 2021

Abstract

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

Lucia, Alessi and Bruno, Brunella and Carletti, Elena and Neugebauer, Katja and Wolfskeil, Isabella, Cover Your Assets: Non-Performing Loans and Coverage Ratios in Europe (September 13, 2021). Economic Policy, 2021;, eiab013, https://doi.org/10.1093/epolic/eiab013, Available at SSRN: https://ssrn.com/abstract=3922824

Alessi Lucia

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
Ispra (VA), I-21027
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Brunella Bruno

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Elena Carletti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Katja Neugebauer

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom

Isabella Wolfskeil (Contact Author)

Bocconi University

Via Roentgen 1
Milano, MI 20136
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
99
Abstract Views
309
rank
383,517
PlumX Metrics