How Does NPLs Securitization Affect EU Banks’ Systemic Risk?

Abstract

This chapter contributes to the growing debate on the NPLs issue by addressing the challenges leading to financial stability and promoting the NPLs resolution plans for EU banks. Our main hypothesis is a U-shaped relationship between the NPLs securitizations and the systemic risk. We find that the maximum amount of NPLs securitization performed by EU banks to minimize the contribution to systemic risk shifts about Global systemic important banks (G-SIB) designation and country risk. The bank’s contribution to systemic risk lies in the involvement of the bank in this instrument and not in its features. Our results contribute to the ongoing debate on the important issue of designing suitable systemic risk indicators that act as Early Warning Systems (EWS) for predicting incoming financial crises. Evaluating the bank's contribution to systemic risk is important to take into account the bank’s exposure to NPL securitization.