Abstract
We investigate the factors influencing Non-Performing Loans (NPLs) in the Italian banking sector from 2011 to 2017, a period marked by significant challenges. Using dynamic panel data methods and considering both bank-specific and macroeconomic variables, our empirical analysis reveals the complexity of NPL volumes in Italy. Our findings highlight that better capitalised banks tend to exhibit lower levels of NPLs, indicating reduced incentives for engaging in riskier practices. We document an inverse relationship between credit growth and NPLs, suggesting a potential outcome of demand-driven credit expansion. Additionally, the countercyclical nature of NPL stocks is evident, with banks' NPL volumes influenced by the economic conditions of the country.
•We investigate the non-performing loan issue in the Italian banking sector during a period of severe challenges.•We employ a robust empirical analysis and account for both bank-specific and macroeconomic variables.•We find that bank capitalization and loan growth contribute the most in explaining the variation of NPL levels across banks.•We confirm the countercyclical nature of NPL stocks.