How bad loans affect banks and financial stability

Economic Commentaries, News Bad loans arise when the borrower no longer pays in accordance with terms of the loan. Large volumes of bad loans can cause banks to encounter problems with their capital adequacy and, at worst, lead to bankruptcy. The Economic Commentary “Bad loans and their effects on banks and financial stability” describes what bad loans are, how they arise, how they impact banks and how they affect financial stability.

The global financial crisis and subsequent European sovereign debt crisis led to a sharp increase in the number of bad loans in the European banking system and the share of bad loans in the EU is still higher than before the financial crisis. Bad loans reduce banks’ profitability and limit their ability to issue new credit. They also risk hampering long-term economic growth, leading to greater uncertainty in the banking system and, in turn, elevated financial stability risks. Reducing the number of bad loans requires measures from authorities, both at the EU and national levels.

By Olle Fredriksson and Niklas Frykström, both of whom work at the Riksbank’s Financial Stability Department.

The Riksbank’s Economic Commentaries contain, for instance, short analyses and debate articles. The opinions expressed in Economic Commentaries are those of the authors and are not to be seen as the Riksbank’s view.

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Updated 14/03/2019