What Drives Forbearance – Evidence from the ECB Comprehensive Assessment

25 Pages Posted: 23 Dec 2015

See all articles by Timotej Homar

Timotej Homar

University of Amsterdam; Tinbergen Institute

Heinrich Kick

European Central Bank (ECB); Goethe University Frankfurt

Carmelo Salleo

European Central Bank (ECB)

Date Written: October 2015

Abstract

Forbearance is a practice of granting concessions to troubled borrowers, typically in the form of prolongation of maturity or refinancing of the loan. While economically useful in some circumstances, it can be used by banks in order to reduce the need for provisions and conceal potential losses. If forbearance is widespread in the banking system, it may result in systemic risk, increasing uncertainty about the quality of banks’ assets and undermining trust in the banking sector’s solvency. This paper provides the first empirical analysis of forbearance in Europe, using the adjustment of nonperforming exposures due to the AQR and the associated increase in required provisions as measures of forbearance. Our results highlight weak macro-economic conditions, lax bank supervision and individual bank weakness as the key factors.

Keywords: forbearance, nonperforming loans, zombie lending, Asset Quality Review

JEL Classification: G21, G28

Suggested Citation

Homar, Timotej and Kick, Heinrich and Salleo, Carmelo, What Drives Forbearance – Evidence from the ECB Comprehensive Assessment (October 2015). ECB Working Paper No. 1860, Available at SSRN: https://ssrn.com/abstract=2707565 or http://dx.doi.org/10.2139/ssrn.2707565

Timotej Homar (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Heinrich Kick

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Carmelo Salleo

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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