Cover your assets: non-performing loans and coverage ratios in Europe
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.
ALESSI Lucia;
BRUNO Brunella;
CARLETTI Elena;
NEUGEBAUER Katja;
WOLFSKEIL Isabella;
2022-06-28
OXFORD UNIV PRESS
JRC125870
0266-4658 (online),
https://academic.oup.com/economicpolicy/article/36/108/685/6330623?login=true,
https://publications.jrc.ec.europa.eu/repository/handle/JRC125870,
10.1093/epolic/eiab013 (online),
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