What drives loan losses in Europe?

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Title: What drives loan losses in Europe?
ISBN: 978-952-6699-70-7
Author: Jokivuolle, Esa ; Pesola, Jarmo ; Virén, Matti
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2014
Series number: 6/2014
Year of publication: 2014
Publication date: 30.1.2014
Published in: Published in Journal of Financial Stability 18, June 2015: 117-126 as "Why is credit-to-GDP a good measure for setting countercyclical capital buffers?"
Pages: 27 s.
Keywords: luotot; luottotappiot; Eurooppa; pankkikriisit; pankkitoiminta;
JEL: E44; G28
Abstract: We model banks' loan losses with a panel of European countries for the period 1982-2012 using three country-specific macro variables: output growth shocks, real interest rates, and a measure of excessive private sector indebtedness. We find that a drop in output has an intensified impact on rising loan losses if the economy is excessively indebted. This may explain differences in loan losses in different recessions across time and across countries. For instance, the dramatic output drop in Finland in 2009 did not cause large loan losses compared with the Finnish crisis of the early 1990s because of the more moderate level of indebtedness. Low interest rates during the recent recession may have been another, perhaps the most important, factor mitigating loan losses. Key words: loan losses, banking crises, indebtedness JEL classification: E44, G28
Rights: https://helda.helsinki.fi/bof/copyright

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