Can Italy Grow Out of Its NPL Overhang? A Panel Threshold Analysis
IMF Working Papers, March 24, 2017
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- Can Italy Grow Out of Its NPL Overhang? A Panel Threshold Analysis
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Bibliographic details
- Authors: Kamiar Mohaddes, Mehdi Raissi
- Published: March 24, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475588651.001
Research question and scope
- Examines whether a tipping point exists for real GDP growth in Italy above which the ratio of non-performing loans (NPLs) to total loans falls significantly.
- Empirical scope: data on 17 Italian regions over the period 1997–2014.
- Methodology: estimation of a heterogeneous dynamic panel-threshold model.
Key findings
- Evidence for the presence of growth-threshold effects on the NPL ratio in Italy.
- Estimated growth threshold: real GDP growth above 1.2 percent, if sustained for a number of years, is associated with a significant decline in the NPLs ratio.
- Given the modest potential growth outlook, banks are likely to struggle to grow out of their NPL overhang without additional measures.
Analysis highlights
- The heterogeneous dynamic panel-threshold model is used to detect differential NPL dynamics conditional on regional real GDP growth.
- The identified threshold effect implies nonlinearity: NPL-ratio behavior differs when real output growth is below versus above the 1.2 percent threshold.
- Sustained growth above the threshold is required to generate a notable decline in NPL ratios rather than short-lived expansions.
Policy implications and recommendations
- Achieving sustained real GDP growth above 1.2 percent requires:
- Decisively tackling long-standing structural rigidities.
- Improving the quality of fiscal policy.
- Because potential growth is modest, further policy measures beyond relying on growth are needed to put the NPL ratio on a firm downward path over the medium term.
Content in this bundle
- Can Italy Grow Out of Its NPL Overhang?, WP/17/66, March 2017