Preventing the deterioration of bank loan portfolio quality: a focus on unlikely-to-pay loans. Issue 7 (3rd May 2021)

• Record Type: Journal Article
• Authors: Cucinelli, Doriana; Gai, Lorenzo; Ielasi, Federica; Patarnello, Arturo
• Is Part Of: European journal of finance. Volume 27:Issue 7(2021)
• Page Start: 613
• Page End: 634
• Publication Date: 2021-05-03
• Subjects: Unlikely-to-pay loans -- non-performing loans -- bank debt -- Italian banking system -- credit risk management -- dynamic panel data; G21 -- C23; Finance -- Periodicals; Finance -- Europe -- Periodicals; International finance -- Periodicals; 332.094
• DOI: 10.1080/1351847X.2020.1830143
• Languages: English
• ISSNs: 1351-847X

Abstract

Abstract : This study examines determinants of: (a) new flows of unlikely-to-pay loans (UTPs), comparing them to determinants of bad loans; and (b) out-flows from UTPs to performing and bad loans. A novel panel data-set covering the period 2010–2016 is used to test hypotheses relating to lending policy, bank capitalization, bad management, and procyclical credit policy. Determinants identified by the existing literature on the wider category of all non-performing loans are in part confirmed for UTPs and in part rejected. The main findings show: (i) a positive relationship exists between bank capitalization and new flows of both UTPs and bad loans; (ii) reducing cost efficiency increases both new flows of UTPs and the worsening of UTPs towards bad loans; and (iii) having a specific unit/office to manage impaired loans increases flows from UTPs to performing loans, but does not decrease flows to bad loans. Our study is useful for banks seeking to prevent new impaired exposures, to accelerate the transition from UTPs to performing loans, and to prevent UTPs worsening to bad loans. The findings reveal the importance of sound and proactive UTP management, given the need for banks to increase provisions for covering UTPs in the near future.