The Impact of Nonperforming Loans on Cross-Border Bank Lending: Implications for Emerging Market Economies
Abstract
Description
This brief suggests how policy makers can tackle the likely rise in nonperforming loans (NPLs) as a result of the coronavirus disease (COVID-19) pandemic to prevent a debt crisis.
This brief investigates the role of NPLs in cross-border bank lending by globally active banks in advanced economies. It notes that rising NPLs could trigger global banks’ withdrawal from emerging economies: during 2000–2017, globally active lenders withdrew capital from emerging market borrowers when NPLs rose. The brief emphasizes how early and even preemptive responses are crucial to addressing NPL problems. Recommendations include acting early to preempt corporate defaults, accelerating insolvency reforms, and developing distressed debt markets.