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
EIOPA Publishes Statement on Adverse Interest Rate EnvironmentRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.