We employ an extensive dataset on borrower-level loans to study the influence of non-performing loans (NPLs) on the supply of bank credit to nonfinancial firms in Italy between 2008 and 2015.
We use time-varying firm fixed effects to control for shifts in demand and changes in borrower characteristics, and we also exploit the supervisory interventions associated with the 2014 Asset Quality Review to identify exogenous variations in the banks’ NPL ratios.
We find that banks’ lending behavior is not causally affected by the level of NPL ratios: the negative correlation between NPL ratios and credit growth in our data is mostly generated by changes in firms’ conditions and contractions in their demand for credit. However, the exogenous emergence of new NPLs and the associated increase in provisions can cause a negative adjustment in credit supply.
