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Non-performing loans in European systemic and non-systemic banks

Ozili, Peterson K (2019): Non-performing loans in European systemic and non-systemic banks. Forthcoming in: Journal of Financial Economic Policy

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Abstract

I examine the behaviour of non-performing loans in European systemic and non-systemic banks. The distinction between systemic banks (GSIBs) and non-systemic banks (non GSIBs) is driven by policy reasons. The findings reveal that more profitable banks witness higher non-performing loans regardless of whether they are systemic or non-systemic. Systemic banks have fewer non-performing loans during economic booms and during periods of increased lending while non-systemic banks experience higher NPLs during periods of increased lending. I also observe that European non-systemic banks that exceed regulatory capital requirements have higher NPLs. In the post-2007 financial crisis period, the NPL of systemic banks is negatively associated with the economic cycle which imply that the NPL of systemic banks is procyclical with the state of the economy, and the NPL of systemic banks are positively associated with loan supply and bank profitability. On the other hand, the NPLs of non-systemic banks is negatively associated with regulatory capital ratios, and is positively associated with bank profitability for non-systemic banks in the post-2007 financial crisis period. The findings have implications.

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