Non-performing loans in the euro area: How they were halved?

Nice speech by Andrea Enria, Chair of the Supervisory Board of the ECB:

By 2014, non-performing loans (NPLs) amounting to almost €1 trillion had piled up on the balance sheets of large banks in the euro area. That was a big problem. Since then, this amount has almost halved, and now stands at €580 billion. In the same period, the ratio of gross NPLs to total loans dropped from around 8% to 3.8%, falling below the 5% attention threshold defined by the EBA. Still, the ratio is above pre-crisis levels and significantly higher than in other major industrialised economies.

So, is the problem solving itself? No, it is not. Policy initiatives have played, and will continue to play, a key role in pushing banks to clean up their balance sheets.

The ECB has launched a few initiatives targeting NPLs, which have been fairly successful. We started with some general guidance to banks on how to deal with NPLs. Then we issued an addendum to this guidance which set out what we expect in terms of provisioning for new NPLs. And we later clarified what we expect in terms of provisioning for the stock of NPLs.

All these initiatives have taken a bank-by-bank approach, of course. Our expectations are bank-specific and strictly supervisory; they are not legally binding. They rather serve as a starting point for supervisory dialogue with each bank. Based on this dialogue, we might then adjust our expectations. All this happens within the second pillar of the Basel framework, our supervisory review and evaluation process (SREP).

In a sense, our initiatives have led the way. European legislation has recently been amended to include rules on minimum loss coverage for NPLs. These rules are legally binding and apply to banks across the board. So our initiatives are working well and have now been mirrored in minimum requirements embodied in actual law – Pillar 1. This makes the overall framework even more robust. We will now have to adjust our guidance to make sure that it is consistent and aligned with the new minimum requirements on NPLs, and that is what we are working on. But after these minor tweaks, I would say that the rules and supervisory policies to deal with NPLs are in place.

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