Working Paper: CEPR ID: DP14379
Authors: Michael Brei; Leonardo Gambacorta; Marcella Lucchetta; Bruno Parigi
Abstract: The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks’ lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000–16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank’s assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank.
Keywords: bad banks; resolutions; lending; nonperforming loans; rescue packages; recapitalisations
JEL Codes: E41; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bad bank segregations + recapitalisation (G28) | recovery of lending (G21) |
| bad bank segregations + recapitalisation (G28) | reduction of NPLs (G33) |
| recapitalisation without asset segregation (G32) | reduce future NPLs (G33) |
| recapitalisation without asset segregation (G32) | do not increase loan growth (G21) |
| segregate impaired assets without recapitalisation (G33) | do not reduce future NPLs (G33) |
| segregate impaired assets without recapitalisation (G33) | do not increase loan growth (G21) |
| asset segregation effectiveness (G32) | funded privately (I22) |
| asset segregation effectiveness (G32) | smaller shares of originating bank's assets segregated (G21) |
| asset segregation effectiveness (G32) | efficient legal systems (K40) |
| bad bank as asset disposition vehicle (G33) | stronger recovery in lending (G21) |
| bad bank as restructuring vehicle (G33) | weaker recovery in lending (F65) |