“Asymmetric Growth, Nonperforming Loans and Banking Crisis” by Zhixiong ZENG
The Chinese University of Hong Kong
This paper develops a two-sector model of asymmetric growth with nonperforming loans (NPLs). Entrepreneurs with profitable outside opportunities default on loans designated for the traditional sector by diverting them to the new sector. Our main results are (i) The fraction of NPLs in total bank loans increases over time; (ii) There exists a critical time when banking crisis occurs; (iii) The fraction of NPLs increases and the onset of banking crisis gets earlier with an acceleration of the economy's growth. We also analyze the consequences of bank bail-out and several proposed institutional changes.