Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 6/2014:
What drives loan losses in Europe?

Esa Jokivuolle (), Jarmo Pesola and Matti Viren ()

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.

Keywords: loan losses; banking crises; indebtedness; (follow links to similar papers)

JEL-Codes: E44; G28; (follow links to similar papers)

27 pages, December 30, 2013

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This paper is forthcoming as:
Jokivuolle, Esa, Jarmo Pesola and Matti Viren, 'Why is credit-to-GDP a good measure for setting countercyclical capital buffers?', Journal of Financial Stability.

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