Do Nonperforming Loans Matter for Bank Lending and the Business Cycle in Euro Area Countries?

This paper estimated the impact of NPLs on bank lending and macroeconomic conditions in twelve euro area countries using a panel Bayesian VAR model. Among the paper’s main findings were that i) an exogenous increase in the change in NPL ratios tends to depress bank lending volumes, widen bank lending spreads, and prompt a fall in real GDP growth and residential real estate prices; ii) shocks to the change in NPL ratios explain a relatively large share of the variance of the variables in the VAR, particularly for countries that experienced a large increase in NPL ratios during the recent crises; and iii) reducing banks’ NPL ratios can improve macroeconomic and financial conditions.