Essays on the Composition and Quality of Banks’ Assets

  • Marta Skrzypinska

Student thesis: Doctoral ThesisDoctor of Philosophy (PhD)

Abstract

The past decade changed how we perceive the risks connected with the composition of bank’s assets and their quality. This thesis provides insights into two topics that gained prominence during this period, namely the sovereign debt and non-performing loans.

The second chapter investigates the role of country characteristics as the determinants of banks’ sovereign debt exposures. It finds that banks’ sovereign debt exposures are related to the quality of political institutions, monetary policy framework, ownership structure of banking sector, regulatory and supervisory environment; even after controlling for differences in wealth across countries. The banks overexposed to the sovereign risk are found to increase the cost of banking crisis, create a potential bank-sovereign nexus and contract credit supply during recessions.

The third chapter presents stylised facts about the episodes of high non-performing loans (NPLs) and policies deployed to reduce NPLs. It provides insights on the effectiveness of different policy packages dealing with NPLs at a country-level and uses an event study methodology to evaluate the impact of reducing the bad debt burden on subsequent economic performance. We provide evidence that a combination of the establishment of asset management companies (AMCs) and government bailout of ailing banks is the most effective approach to resolving an average NPL crisis. Once a sharp reduction in NPL ratios occurs, economic growth improves by more than 1.5 percentage points a year over several years. This is reflected in higher investment and consumption growth and lower unemployment rate.

The fourth chapter investigates the question of cross-border spillovers from reducing nonperforming loans. The global banking system is a complex network of foreign subsidiaries that facilitates spillover of risks. We exploit this multinational dimension to investigate the importance of credit risk transmission. Firstly, we show that changes in the NPL stock of a parent bank affect the non-performing exposures of its foreign subsidiary banks. Secondly, as a result of this transmission, policies aimed at reducing NPLs can have detectable crossborder effects. We find that in particular the establishment of asset management companies (AMCs) in the jurisdiction of parent bank has a positive effect on the NPLs reduction of the foreign subsidiaries; where the estimated treatment effect is a 12 percent decline in the stock of non-performing loans.
Date of Award23 Jan 2020
Original languageEnglish
Awarding Institution
  • The University of Bristol
SupervisorNick J Taylor (Supervisor) & Balint L Horvath (Supervisor)

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