Non-performing loans and bank lending: evidence for Portugal

In the wake of the international financial crisis and the sovereign debt crises there has been a pronounced and increase of non-performing loans (NPLs) with the potential to impact banks’ supply of credit and ultimately economy-wide growth. This is a relevant topic in many European Countries, including Portugal, where in mid-2016 NPLs accounted at one time for almost 18% of banks’ total loans.

The paper analyses the impact of Portuguese banks’ NPLs on their loan supply to non-financial corporations (NFCs) in the 2009-2018 period. The study builds on Central Credit Register granular data and controls for loan demand and several bank characteristics. There are three main findings. First, there is no evidence that NPL ratios per se constrained bank loan supply to firms in this period. Put differently, on average, for a given firm, the difference in the evolution of credit granted by two banks that only differ in the level of the NPL ratio is not statistically significant. This result holds for both the crisis and the post crisis periods (2009-2015 and 2016-2018, respectively), and for firms with low and medium credit risk regardless of its size. Second, there is a positive, although statistically weak, relation between NPLs and credit granted to performing NFCs with high credit risk. Third, in the post crisis period, higher NPLs appear associated with a lower propensity to initiate new credit relationships with firms.

While the study focuses on the effect of NPLs on credit supply, other bank variables also impacted credit supply, namely, banks’ liquidity conditions and business models (proxied by the recourse to ECB funding and the share of household credit, respectively). Banks’ capital position seems to have been significant only during the crisis period.

Click here to go to the paper by Carla marques, Ricardo Martinho, and Rui Silva.