Banking: Council sets out action plan for non-performing loans

On 11 July 2017, the Council agreed an action plan to address the problem of non-performing loans in the banking sector.

It outlined a mix of policy actions to help reduce stocks of non-performing loans (NPLs), which remain at high levels within the EU, and to prevent their future emergence.

“Non-performing loans are a problem for the banking industry for which solutions have until now been mainly defined at the national level”, said Toomas Tõniste, minister for finance of Estonia, which currently holds the Council presidency. “We need to free up these resources, make our financial system more resilient and prevent the re-emergence of NPL issues in the future”.

NPLs are bank loans that are subject to late repayment or unlikely to be repaid without requiring the sale of collateral.

The financial crisis and ensuing recessions have left banks in some member states with particularly high levels of NPLs. These can generate negative cross-border spill-overs and can affect market perception of the EU banking sector. High NPL levels can drag heavily on investment, and hence on the economy.

Resolving NPLs, on the other hand, can help reduce financial fragmentation and facilitate capital flows within the single market.

On the basis of an expert report, the Council highlighted the need for action as regards:

  • bank supervision;
  • the reform of insolvency and debt recovery frameworks;
  • the development of secondary markets for NPLs (‘distressed assets’);
  • restructuring of the banking industry.

According to the report, prepared by a sub-group of the Council’s financial services committee, NPLs amounted to nearly €1 trillion at the end of 2016. That is the equivalent of roughly 6.7% of the EU’s GDP and 5.1% of total bank loans.

But there are large variations within the EU, where ratios range from 1% to 46%. In some countries NPLs are concentrated in real estate, whilst in others they are scattered across the economy.

Persistently high NPL levels pose a problem, as they:

  • are a drag on bank profitability due to administrative costs and higher funding costs for banks. Provisioning needs deplete banks’ capital base;
  • pose a risk for the viability of high-NPL banks;
  • lock up capital to back unproductive assets, thus weighing down on monetary policy transmission and on the financing of the economy.

Banks are primarily responsible for restructuring their business models and resolving their NPL issues. However, given their current magnitude, NPL stocks in some member states may not decline at a sufficient pace, despite the economic recovery.he Council agreed that measures to address the issue would be beneficial for the EU as a whole. Incentives for banks to deal with NPLs proactively should be enhanced, whilst avoiding the disruptive effects of fire sales. Measures should both address existing stocks of NPLs and prevent a further accumulation of NPLs in the future.

The conclusions were adopted at a meeting of the Economic and Financial Affairs Council.

The Council agreed to revert to the issue regularly, to take stock of the evolution of NPLs in Europe and of actions taken.