What is the Impact of Non-Performing Loans on Global Banking? Decomposing Productivity Growth

This paper examines the productivity growth of banks around the world. We opt for a novel parametric methodology that decomposes productivity growth into different components, and in particular into a ‘shadow' quasi-fixed input that would impose negative externalities to bank performance. Using a flexible translog cost function, we argue that such an input is nonperforming loans as they capture bank risk-taking. In the empirical section we show the destructive effect of nonperforming loans on bank-specific productivity in advanced, emerging and developing economies for the period from 2000 to 2013. Furthermore, we show that bank risk-taking and capital are negatively related to productivity growth, while liquidity has a positive impact