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The role of non-performing loans in the transmission of monetary policy by Sebastian Bredl
Discussion by Angela Maddaloni (ECB)
Fifth Research Workshop of the MPC Task Force on Banking Analysis for Monetary Policy
Brussel, 1 February 2018
Any views expressed are only the speaker’s own and should not necessarily be regarded as views of the ECB or the Eurosystem.

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What the paper does
Investigates the role of non-performing loans in affecting lending rates for newly granted loans in the euro area
In particular, it analyses if this effect works through the increase in the funding cost of the bank
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Results
Results suggest that there is no relationship with the (gross) stock of NPL
A higher stock of net NPL is associated with higher lending rates, but this may be offset by the impact of loan loss reserves
Relationship between funding costs and lending rates is weak and therefore not likely to be the main channel of transmission
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4. Overall assessment
The paper is well written and a lot of work has been done in terms of different specifications, subsample analysis and robustness
It would be beneficial to focus on few specifications and dig deeper on the factors affecting the results
To increase the added value of the paper, it would be good to leverage on the specificities of the data used

5. Streamlining the specifications
There are two main groups of specifications
FE and GMM with and without macroeconomic controls
Results suggests that the specifications with macroeconomic controls is more precise. This seems to reflect the fact of course the NPL are endogenous to economic conditions and affect country risk. Maybe keep only this specification?

6. The role of aggregation at banking group
Model (1) and (3) are estimated at the individual MFI level, while model (2) is estimated at the banking group level. This is confusing, it makes it difficult to make comparisons and interpret the evidence
What is the rational to perform the analysis at the individual level? How would the effect of NPLs on the balance sheet change for individual subsidiaries or for banking group

7. The role of bank funding
Bank funding cost depends on the composition of the liabilities
YTM takes into account only one part of the funding costs. Deposits and wholesale (interbank + short-term) are not considered
Maybe NPL are more related to the rates paid on the wholesale market (need some proxy for that) but also the fraction of liabilities that it is financed by shorter-term liabilities
AFC seems the correct measure to use

8. Minor observations Why restricting the analysis only to NFC loans?
Not clear how the pass-through of monetary policy is measured. Is the OIS-swap rate also included in the model (not only in the interaction)?
Link between rate fixation and NPL?

9. Some interesting extensions
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Some interesting extensions
Analysis based on credit register data can identify credit supply shocks related to NPL much better. What are the advantages of using IBSI-IMIR data?
Cross-country dimension
Macroeconomic impact of NPL
Possible extensions:
Impact of NPL on transmission of monetary policy, but considering cross-country differences for the monetary policy stance
Impact of national supervision as opposed to centralised supervision? (Popov et al. (2017) show that banks in the SSM have lower funding costs)
Importance of the NPL distribution?
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