BIS Publishes Paper on Bad Bank Resolutions and Bank Lending
BIS published a working paper that examines whether bad banks, or impaired asset segregation tools, and recapitalization lead to a recovery in the lending of originating banks and a reduction in the non-performing loans (NPLs). A key finding of the study is that only when the two tools are used together do they have the desired effect and a sizable impact on the two response variables: neither tool is effective separately. In countries where the legal system is more efficient, credit recovery and NPLs reductions are stronger in response to impaired asset segregations.
The paper first discusses the mechanisms and different dimensions of asset segregation. Then, it lays out the testable hypotheses, before describing the data and conducting the empirical analysis and moving on to presenting the conclusions of the study. The study is based on a novel data set covering 135 banks from 15 European banking systems during 2000–2016. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalization with asset segregation. The results continued to hold when study addressed the potential endogeneity problem associated with the creation of a bad bank. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in the asset segregation events, the study was able to show which features of resolution schemes have a stronger impact on the response variables and found that asset segregation is more effective when:
- Asset purchases are funded privately
- Smaller shares of the originating bank's assets are segregated
- Asset segregation occurs in countries with more efficient legal systems
Related Links
Keywords: International, Banking, NPLs, Credit Risk, Resolution, Impaired Asset Segregation Tools, Research, BIS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
US Agencies Propose Revisions to Call Reports and FFIEC 101 ReportRelated Articles
ESAs Issue Multiple Regulatory Updates for Financial Sector Entities
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
EBA Finalizes Methodology for Stress Tests, Issues Other Updates
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
OSFI Sets Out Work Priorities and Reporting Updates for Banks
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
APRA Finalizes Changes to Capital Framework, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.
BIS Hub and Central Banks Conduct CBDC and DeFI Pilots
The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.
ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations
The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.
ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector
Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)
EC Adopts Final Rules Under CRR, BRRD, and Crowdfunding Regulation
The European Commission (EC) recently adopted regulations with respect to the calculation of own funds requirements for market risk, the prudential treatment of global systemically important institutions (G-SIIs)
