Cover your assets: non-performing loans and coverage ratios in Europe | Zendy

Lucia Alessi | Zendy; Brunella Bruno | Zendy; Elena Carletti | Zendy; Katja Neugebauer | Zendy; Isabella Wolfskeil | Zendy

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Cover your assets: non-performing loans and coverage ratios in Europe

Author(s) -

Lucia Alessi,

Brunella Bruno,

Elena Carletti,

Katja Neugebauer,

Isabella Wolfskeil

Publication year - 2021

Publication title -

economic policy

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.579

H-Index - 75

eISSN - 1468-0327

pISSN - 0266-4658

DOI - 10.1093/epolic/eiab013

Subject(s) - capitalization , loan , non performing loan , business , asset (computer security) , sample (material) , financial system , finance , monetary economics , economics , philosophy , linguistics , chemistry , computer security , chromatography , computer science

SUMMARY We analyse the determinants of coverage ratios and their components [non-performing 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.

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