Regulators need ‘stick and carrot’ to deal with NPLs – BoI paper

The Bank of Italy

Regulators dealing with banks with high non-performing loan levels need to adopt a “stick and carrot” policy, a working paper published by the Bank of Italy says.

In Optimally solving banks’ legacy problems, Anatoli Segura and Javier Suarez present a stylised model of how lenders interact with regulators.

In their model, banks have non-performing loans (NPLs), and there is a deposit guarantee scheme. Regulators intervene in the market by requiring banks to dispose of different levels of NPLs

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