XXV Edition

1-2 December 2016"

Non Performing Loans, Moral Hazard & Supervisory Authority: the Italian Banking System

Cincinelli Peter, University of Bergamo
Piatti Domenico, University of Bergamo

This paper aims to detect the existence of an opportunistic behaviour – i.e. moral hazard – within the Italian banking sector by investigating how banks face their challenges in lending relationships and engage in risky behaviour. In order to detect this opportunistic behaviour, we adopt a fixed effect threshold panel analysis approach to investigate the role of Non Performing Loans (NPLs) in signalling moral hazard problems. Applying a balanced panel regression model to a dataset of 442 Italian commercial banks – composed of three different kinds of banks (S.p.A., popolari, mutual banks) – from 2006 to 2014, we investigate whether banks’ lending behaviour is sensitive to high levels of NPLs and, more importantly, whether banks with higher NPLs ratios tend to adopt a more aggressive and riskier lending strategy. We also empirically test the hypothesis that the supervisory activity of the Italian banking authority – through credit risk sanctions – is effective in providing incentives for banks to limit their risky lending strategy and in ensuring the stability of the Italian banking system. The empirical results show that banks may be affected by moral hazard problems, and that credit risk sanctions are considered essential for ensuring the stability of the system.

Area: Banking

Keywords: Non-performing loans, Moral Hazard, Lending behaviour, Bank regulation

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