Preparing for a wave of non-performing loans: Empirical insights and important lessons

Abstract

The current pandemic crisis is challenging the banking system along both known and unknown tracks (Carletti et al. 2020, Beck and Keil 2021). While the accumulation of non-performing loans (NPLs) on banks’ balance sheets is typical for country-wide macroeconomic crises, there are several other characteristics of the pandemic that are not: first, the extraordinary cross-sector differences in the crisis’ impact (Demmou et al. 2021); second, the significant fiscal support addressing firms and households (Aussiloux et al. 2021); and third, the high degree of uncertainty concerning the economic consequences of serial lockdowns (Woloszko 2020, Ornelas 2020). The high degree of uncertainty is also the reason why policy proposals on NPL resolution should take a scenario-based approach (i.e. they should be designed as conditional on the events unfolding).