How Non-Performing Loans Reshape Bank Liquidity Determinants: Evidence from the European Union

(1) Background: The aim of this paper is to identify a critical non-performing loans threshold and to examine whether the impact of macroeconomic and bank-specific determinants on bank liquidity differs across credit-risk regimes. (2) Methods: Using annual panel data for EU countries over the period 2007–2022, this study applies a threshold panel ARDL approach to identify regime-dependent liquidity dynamics under different levels of credit risk. (3) Results: The empirical results find a critical NPL threshold of 6%, in which the impact of credit risk on bank liquidity becomes statistically significant. In the low-NPL regime, liquidity is positively affected by profitability, capital adequacy, bank size, GDP growth, and unemployment. In contrast, in the high-NPL regime, credit risk exerts a significant negative effect on liquidity, while the positive effects of profitability, capital adequacy, bank size, GDP growth, and unemployment become stronger. Inflation remains statistically insignificant across both regimes. (4) Conclusions: The main contribution of this research lies in providing robust empirical evidence of a nonlinear liquidity–credit risk relationship in the banking system of EU and quantifying how the strength of liquidity determinants intensifies once non-performing loans exceed a critical threshold.