XXV Edition

1-2 December 2016"

Credit Risk in European Banks: Does Effective Risk Management Matter?

Cucinelli Doriana , University of Milan-Bicocca
Di Battista Maria Luisa , Catholic University of the Sacred Heart, Milan
Marchese Malvina , University of Genoa
Nieri Laura, University of Genoa

This paper investigates the empirical relevance of macroeconomic variables, bank-specific features and institutional variables on bank loan portfolio deterioration. In particular, we establish the empirical relevance of two novel bank-specific characteristics, i.e. the effectiveness of bank risk management and the bank’s risk profile. We employ a novel panel data set of 177 Western European banks over a decade period spanning from 2006 to 2015. Our dynamic panel estimates show that during the recent financial and economic crisis, banks with a lower risk appetite and relying on more sophisticated risk-management practices faced a lower deterioration of their loan portfolios and offered more credit than other banks without increasing their credit risk. Our analysis acknowledges also the importance of the juridical and institutional context as drivers of loan quality deterioration.

Area: Banking

Keywords: credit risk; non-performing loans; internal rating based model; GMM

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