When Jobs Vanish, Loans Sour: Unemployment and Non-Performing Loans in Post-Crisis Europe

Why did bad loans pile up so unevenly across Europe after the 2008 financial crisis? Using data for 28 European countries from 2008 to 2016, this paper finds that rising unemployment was the strongest driver of loan defaults: each additional percentage point of joblessness is associated with roughly 1.5 additional percentage points of non-performing loans. Faster economic growth eases the problem, although more modestly. Bank capital ratios show no reliable protective effect. Countries with denser bank branch networks tend to have fewer defaults, though this evidence is only suggestive. Past loan problems also appear to linger, but this persistence is imprecisely estimated. Taken together, the results suggest that protecting employment and speeding up the resolution of bad debts deserve a central place in banking-stability policy.