Karlo Kauko (BOFIT): The vanishing interest income of Chinese banks
Chinese banks may have more non-performing loans (NPLs) than officially reported. Hidden NPLs earn no interest income, and consequently they have an adverse impact on gross interest income. A frontier of efficient interest income of a profit maximising bank with no credit quality problems is derived with the stochastic frontier analysis. The deviation of actual interest income from the hypothetical efficient income is an indicator of hidden non-performing loans. Dependence on interbank funding seems to increase the quantity of hidden NPLs, but the effect is temporary. Strongly capitalised banks have more hidden NPLs.
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