This study examines determinants of: (a) new flows of unlikely-to-pay loans (UTPs), comparing them to determinants of bad loans; and (b) out-flows from UTPs to performing and bad loans. A novel panel data-set covering the period 2010–2016 is used to test hypotheses relating to lending policy, bank capitalization, bad management, and procyclical credit policy. Determinants identified by the existing literature on the wider category of all non-performing loans are in part confirmed for UTPs and in part rejected. The main findings show: (i) a positive relationship exists between bank capitalization and new flows of both UTPs and bad loans; (ii) reducing cost efficiency increases both new flows of UTPs and the worsening of UTPs towards bad loans; and (iii) having a specific unit/office to manage impaired loans increases flows from UTPs to performing loans, but does not decrease flows to bad loans. Our study is useful for banks seeking to prevent new impaired exposures, to accelerate the transition from UTPs to performing loans, and to prevent UTPs worsening to bad loans. The findings reveal the importance of sound and proactive UTP management, given the need for banks to increase provisions for covering UTPs in the near future.

Preventing the deterioration of bank loan portfolio quality: a focus on unlikely-to-pay loans / Ielasi, Federica; Gai, Lorenzo. - In: EUROPEAN JOURNAL OF FINANCE. - ISSN 1351-847X. - STAMPA. - (2020), pp. 1-22. [10.1080/1351847X.2020.1830143]

Preventing the deterioration of bank loan portfolio quality: a focus on unlikely-to-pay loans

Ielasi, Federica
;
Gai, Lorenzo
2020

Abstract

This study examines determinants of: (a) new flows of unlikely-to-pay loans (UTPs), comparing them to determinants of bad loans; and (b) out-flows from UTPs to performing and bad loans. A novel panel data-set covering the period 2010–2016 is used to test hypotheses relating to lending policy, bank capitalization, bad management, and procyclical credit policy. Determinants identified by the existing literature on the wider category of all non-performing loans are in part confirmed for UTPs and in part rejected. The main findings show: (i) a positive relationship exists between bank capitalization and new flows of both UTPs and bad loans; (ii) reducing cost efficiency increases both new flows of UTPs and the worsening of UTPs towards bad loans; and (iii) having a specific unit/office to manage impaired loans increases flows from UTPs to performing loans, but does not decrease flows to bad loans. Our study is useful for banks seeking to prevent new impaired exposures, to accelerate the transition from UTPs to performing loans, and to prevent UTPs worsening to bad loans. The findings reveal the importance of sound and proactive UTP management, given the need for banks to increase provisions for covering UTPs in the near future.
1
22
Goal 9: Industry, Innovation, and Infrastructure
Goal 12: Responsible consumption and production
Ielasi, Federica; Gai, Lorenzo
File in questo prodotto:
File Dimensione Formato  
European journal of finance.pdf

Accesso chiuso

Tipologia: Pdf editoriale (Version of record)
Licenza: DRM non definito
Dimensione 1.82 MB
Formato Adobe PDF
1.82 MB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in FLORE sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2158/1214047
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 3
  • ???jsp.display-item.citation.isi??? 3
social impact