Benchmarking Non-Performing Loans

This paper provides a new perspective to evaluate the economic role played by banks in non-performing loans (NPLs) accumulation. We estimate a benchmark NPL levels on the judicial inefficiency dimension, controlling for country- and bank-specific factors. To this end, first, we empirically establish whether judicial inefficiency is a key determinant of NPLs in the European banking system for the period 2006–2017. Using dynamic-Generalized Method of Moments estimations, we show that higher contract enforcement inefficiency increases NPLs. Then, we estimate NPLs benchmark levels using a dose response function based on the judicial inefficiency. Our results show that Norway, Sweden, and Italy performed better than the European mean while Austria, Germany, Spain, Ireland, Cyprus, and Greece performed worse than the European mean. Our results have several policy implications