Featured Product

    IMF Paper Examines Dynamics of NPLs During Banking Crises

    December 06, 2019

    IMF published a working paper that studies a dataset for the dynamics of non-performing loans (NPLs) during 88 banking crises that have happened since 1990. The data show similarities across crises during NPL build-ups but less so during NPL resolutions. The study finds a close relationship between NPL problems—elevated and unresolved NPLs—and the severity of post-crisis recessions. A machine learning approach identifies a set of pre-crisis predictors of NPL problems related to weak macroeconomic, institutional, corporate, and banking-sector conditions. The findings suggest that reducing pre-crisis vulnerabilities and promptly addressing NPL problems during a crisis are important for post-crisis output recovery.

    The findings of the paper have important policy implications. First, the close relationship between post-crisis output growth and NPLs points to the importance of macro-financial linkages in crisis recovery. Second, the identified risk factors of adverse NPL dynamics offer useful indicators for NPL risk monitoring. The results also suggest that better ex-ante macroeconomic, financial, and institutional policies can alleviate the impact of banking crises. Finally, the analysis illustrates that reliable NPL data are vital for NPL monitoring and for the formulation of evidence-based NPL resolution polices.

    The studied dataset covered the annual evolution of NPLs for 88 banking crises in 78 countries since 1990. This includes all major regional and global crises during this period (for example, the Nordic banking crisis, the Asian financial crisis, and the Global Financial Crisis) and numerous standalone crises in transition and low-income economies. For each crisis, NPLs are reported over an eleven-year long window that starts three years before the crisis and extends to seven years after the crisis. The data allowed IMF to study NPL dynamics during banking crises in the most comprehensive way so far. IMF used a machine learning approach to study which pre-crisis conditions matter for the likelihood of elevated NPLs, the duration and magnitude of NPL build-up, and the likelihood of timely NPL resolution. The paper is complemented by an online Appendix and the full dataset.

    The study found that a large majority of crises (81%) exhibit elevated NPLs that exceed 7% of total loans. In nearly half the crises, NPLs more than doubled compared to the pre-crisis period. In their trajectory, NPLs typically follow an inverse U-shaped pattern. They start modest, rise rapidly around the start of the crisis, and peak some years afterwards, before finally stabilizing and declining. While there is much commonality across crises during the NPL build-up, the experiences during NPL resolution differ. The decline in NPLs is rapid in some cases and protracted in others. In 30% of the crises, NPLs remain above 7% of total loans seven years after the start of the crisis. In a few cases, NPLs decline and peak again, forming an M-shaped pattern.

    It was found that countries with higher pre-crisis GDP per capita (which may proxy institutional strength) and lower corporate leverage are less likely to experience elevated NPLs during a crisis. For the crises with elevated NPLs, lower bank return on assets and shorter corporate debt maturities predict higher peak NPLs, while lower government debt, flexible exchange rates, and higher growth predict faster NPL stabilization and resolution. Also, NPL stabilization and resolution takes longer in higher pre-crisis credit growth. Overall, these results suggest that better ex-ante macroeconomic, institutional, corporate, and banking-sector conditions and policies can help reduce NPL vulnerabilities during a crisis.

     

    Related LinkWorking Paper

    Keywords: International, Banking, NPL, Credit Risk, Machine Learning, IMF

    Related Articles
    News

    EBA Analyzes Impact of Unwind Mechanism of Liquidity Coverage Ratio

    EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.

    November 19, 2020 WebPage Regulatory News
    News

    ECB Outlines Views on Possible Changes to AnaCredit Rule and TLTROs

    In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.

    November 19, 2020 WebPage Regulatory News
    News

    IASB Begins First Phase of Post-Implementation Review of IFRS 9

    IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Report Examines Progress in Resolvability of Systemic Institutions

    FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.

    November 18, 2020 WebPage Regulatory News
    News

    EBA Benchmarks National Insolvency Frameworks Across EU

    EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Reports Assess Impact of Pandemic on Financial Stability

    FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.

    November 17, 2020 WebPage Regulatory News
    News

    RBNZ Consults on Implementation of Capital Review Changes

    RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.

    November 17, 2020 WebPage Regulatory News
    News

    IASB Announces Andreas Barckow as the New Chair from July 2021

    The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.

    November 17, 2020 WebPage Regulatory News
    News

    HKMA Consults on Capital Rules for Bank Equity Investments in Funds

    HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.

    November 17, 2020 WebPage Regulatory News
    News

    ESRB Supports Extension of Macro-Prudential Measure by Swedish FSA

    ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).

    November 17, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6153