Do non-performing loans matter for bank lending and the business cycle in euro area countries?

Figures & data

Table 1. Data sources.

Variable	Source
Real GDP growth	ECB SDW
Inflation	ECB SDW
RRE prices	ECB SDW
Euribor	ECB SDW
Corporate loans	ECB BSI
Mortgage loans	ECB BSI
Corporate spread	ECB MIR and SDW
Mortgage spread	ECB MIR and SDW
Capital and reserves ratio	ECB BSI
Change in NPL ratio	IMF FSI, Banque de France, Banco de España
	Central Bank of Cyprus, Irish Central Statistics Office, Bankscope

Table 2. Summary statistics.

Variable	Obs	Mean	Std. Dev.	Min	Max
Real GDP growth	564	1.0	4.0	−17.5	12.0
Inflation	564	1.6	1.6	−3.1	10.6
RRE prices	564	1.8	10.5	−40.3	57.5
Euribor	564	1.4	1.7	−0.3	5.0
Corporate loans	564	4.6	12.0	−20.2	67.5
Mortgage loans	564	5.7	12.3	−33.0	87.4
Corporate spread	564	2.5	1.4	0.2	6.6
Mortgage spread	564	2.3	1.1	−0.3	5.0
Capital and reserves ratio	564	12.3	10.9	2.7	68.8
Change in NPL ratio	564	0.8	3.3	−8.2	27.2

Figure 1. Non-performing loan ratios.

Note: The data sample spans from 2006Q1 to 2017Q3. The displayed NPL ratios are based on data sourced from the IMF FSI, Banque de France, Banco de España, Central Bank of Cyprus and Bankscope.

Table 3. Correlation matrix among the variables included in the panel VAR.

	Real GDP	Inflation	RRE	Euribor	Corporate	Mortgage	Corporate	Mortgage	Capital and	Change in
	growth		prices		loans	loans	spread	spread	reserves ratio	NPL ratio
Real GDP growth	1
Inflation	0.15***	1
RRE prices	0.79***	0.26***	1
Euribor	0.15***	0.52***	0.25***	1
Corporate loans	0.35***	0.57***	0.59***	0.69***	1
Mortgage loans	0.40***	0.49***	0.62***	0.52***	0.78***	1
Corporate spread	−0.29***	−0.30***	−0.32***	−0.47***	−0.36***	−0.27***	1
Mortgage spread	−0.33***	−0.42***	−0.39***	−0.74***	−0.55***	−0.44***	0.69***	1
Capital and reserves ratio	0.01	−0.27***	−0.11**	−0.37***	−0.26***	−0.25***	0.61***	0.42***	1
Change in NPL ratio	−0.55***	−0.19***	−0.47***	−0.09*	−0.18***	−0.16***	0.39***	0.33***	0.15***	1

Note: The data sample spans from 2006Q1 to 2017Q3. (***), (**) and (*) denote statistical significance at the 1%, 5% and 10% levels, respectively. Sources: Data constructed based on the IMF, ECB, Banque de France, Banco de España, Central Bank of Cyprus, Central Statistics Office of Ireland and Bankscope.

Figure 2a. Response to a shock to the change in the NPL ratio with new ordering.

Note: The Figure reports the responses of selected endogenous variables to one standard deviation shock to the change in NPL ratios. Real GDP growth, headline inflation, residential real estate prices and corporate and mortgage loans are expressed in annual growth rates. The Euribor, bank lending spreads, the change in NPL ratios and the capital and reserves-to-asset ratio are expressed in percentage points. Responses are reported for 4 years (16 quarters) after the shock (assumed to take place at time 0). The median of the accepted draws is plotted together with the 16% and 84% Bayesian credibility bands.

Figure 2b. Continued.

Table 4. Forecast error variance decomposition (shock to the change in the NPL ratio).

NPL shock
Variable		Year	AT	BE	CY	EE	ES	FR	GR	IE	IT	LT	NL	PT
Corporate		1st	0%	0%	0%	1%	0%	0%	0%	1%	2%	1%	0%	1%
loans		2nd	1%	0%	6%	2%	0%	1%	1%	6%	5%	5%	0%	2%
		3rd	1%	0%	14%	2%	1%	1%	1%	9%	6%	7%	1%	4%
		4th	1%	0%	17%	2%	1%	1%	1%	10%	6%	8%	1%	5%
Mortgage		1st	0%	0%	2%	2%	1%	0%	0%	0%	0%	1%	0%	0%
loans		2nd	1%	0%	6%	2%	2%	0%	0%	1%	0%	2%	0%	1%
		3rd	1%	0%	11%	2%	2%	1%	0%	1%	0%	2%	0%	1%
		4th	1%	0%	14%	2%	3%	1%	1%	1%	0%	3%	0%	2%
Change		1st	81%	71%	95%	55%	87%	56%	88%	93%	80%	88%	80%	94%
in NPL ratio		2nd	61%	53%	94%	39%	71%	38%	80%	92%	66%	83%	61%	92%
		3rd	51%	40%	94%	34%	63%	28%	76%	91%	58%	81%	48%	90%
		4th	47%	32%	93%	33%	59%	24%	74%	91%	55%	80%	41%	89%
Inflation		1st	3%	9%	12%	3%	2%	3%	2%	2%	5%	4%	1%	1%
		2nd	3%	5%	14%	6%	2%	4%	3%	2%	5%	3%	1%	3%
		3rd	3%	4%	15%	6%	2%	4%	3%	3%	5%	4%	1%	3%
		4th	3%	4%	17%	6%	2%	4%	3%	4%	5%	4%	2%	3%
GDP growth		1st	1%	2%	14%	16%	3%	8%	2%	23%	6%	9%	2%	2%
		2nd	2%	3%	28%	15%	2%	7%	2%	22%	5%	10%	4%	2%
		3rd	2%	2%	33%	15%	2%	6%	2%	22%	5%	10%	4%	3%
		4th	2%	2%	33%	14%	3%	5%	2%	22%	5%	10%	3%	3%
Mortgage		1st	2%	1%	8%	4%	5%	1%	4%	16%	3%	5%	1%	3%
spread		2nd	2%	1%	18%	3%	4%	1%	4%	21%	5%	10%	2%	6%
		3rd	2%	1%	23%	2%	4%	1%	4%	21%	6%	11%	2%	7%
		4th	2%	1%	24%	2%	4%	1%	4%	21%	7%	12%	2%	7%
Corporate		1st	1%	2%	10%	4%	5%	4%	4%	22%	11%	3%	3%	2%
spread		2nd	1%	2%	19%	5%	5%	4%	4%	32%	13%	7%	4%	4%
		3rd	1%	3%	25%	5%	5%	4%	5%	36%	15%	9%	5%	6%
		4th	1%	3%	29%	5%	5%	4%	6%	38%	16%	10%	5%	7%
RRE prices		1st	1%	4%	30%	11%	6%	5%	2%	25%	2%	4%	4%	3%
		2nd	1%	5%	49%	11%	7%	5%	5%	36%	3%	7%	6%	6%
		3rd	1%	5%	55%	11%	7%	5%	7%	40%	4%	8%	7%	8%
		4th	2%	5%	56%	12%	7%	5%	8%	41%	4%	9%	6%	9%
Capital and		1st	7%	1%	15%	3%	6%	4%	1%	7%	2%	3%	3%	3%
reserves ratio		2nd	9%	1%	28%	2%	11%	6%	2%	23%	4%	7%	2%	8%
		3rd	9%	1%	37%	2%	14%	8%	2%	32%	6%	10%	2%	12%
		4th	9%	1%	42%	2%	15%	9%	2%	38%	8%	12%	3%	15%
Euribor		1st	2%	1%	4%	5%	1%	1%	3%	19%	6%	3%	1%	2%
		2nd	2%	1%	17%	5%	1%	1%	3%	24%	9%	8%	1%	4%
		3rd	2%	1%	26%	4%	1%	1%	4%	25%	10%	10%	1%	6%
		4th	2%	1%	32%	4%	1%	1%	5%	26%	11%	11%	1%	8%

Note: The table reports the share of the variance of the variables in the VAR which is explained by a shock to the change in the NPL ratio over a horizon of 16 quarters. The median of the accepted draws of the variance decomposition from the posterior distribution is reported.

Figure 3. Response to a shock to the annual rate of change in NPL volumes.

Note: The Figure reports the responses of selected endogenous variables to one standard deviation shock to the annual rate of change in NPL volumes. Real GDP growth, headline inflation, residential real estate prices and corporate and mortgage loans are expressed in annual growth rates. The Euribor, bank lending spreads, the change in NPL ratios and the capital and reserves-to-asset ratio are expressed in percentage points. Responses are reported for 4 years (16 quarters) after the shock (assumed to take place at time 0). The median of the accepted draws is plotted together with the 16% and 84% Bayesian credibility bands.

Figure 4. Observed and assumed out-of-sample baseline and adverse change in NPL ratios for the structural scenario analysis.

Note: The data sample spans from 2006Q1 to 2017Q3. The out-of-sample assumptions for the baseline and adverse paths for the change in NPL ratios span from 2017Q4 to 2020Q3. The data are sourced from the IMF FSI, Banque de France, Banco de España, Central Bank of Cyprus and Bankscope.

Figure 5. Difference in the structural scenario forecasts between the baseline and the adverse path for the main variables included in the panel VAR.

Note: The figure reports the difference between the baseline and the adverse structural scenario forecasts of the main variables in the panel VAR. Under both the baseline, the adverse assumption, the forecasts for the variables in the VAR are computed assuming that only the structural shock to the change in NPL ratios adjusts to ensure the conditioning path for this variable. Real GDP growth, headline inflation, residential real estate prices and corporate and mortgage loans are expressed in annual growth rates. The Euribor, bank lending spreads, the change in NPL ratios and the capital and reserves-to-asset ratio are expressed in percentage points.