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
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
US Agencies Propose Revisions to Call Reports and FFIEC 101 ReportRelated Articles
EU Amends CRD4 and CRD5 as Part of Capital Markets Recovery Package
EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.
EU Committee Recommends Systemic Risk Buffer of 4.5% in Norway
The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.
PRA Clarifies Approach to Onshoring of Credit Risk Rules for UK Banks
In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition.
FSB Sets Out Work Priorities for 2021
In a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.
EU Publishes Corrigendum to Revised Capital Requirements Regulation
EU published, in the Official Journal of the European Union, a corrigendum to the revised Capital Requirements Regulation (CRR2 or Regulation 2019/876).
ESAs Issue Statement on Application of Sustainability Disclosures Rule
ESAs published a joint supervisory statement on the effective and consistent application and on national supervision of the regulation on sustainability-related disclosures in the financial services sector (SFDR).
EC Consults on Crisis Management and Deposit Insurance Frameworks
EC published a public consultation on the review of crisis management and deposit insurance frameworks in EU.
HKMA Enhances Loan Guarantee Scheme to Alleviate Pressure on SMEs
HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.
EBA Proposes Standards for Supervisory Cooperation Under IFD
EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.
BoE Addresses Banks in Scope of First Resolvability Assessment
BoE issued a letter to the CEOs of eight major UK banks that are in scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle.
