EU Council steps in to solve NPL problem

As summer came to a close, the Council of the EU stepped in with an action plan to help solve the European non-performing loans problems.

EU Council steps in to solve NPL problem

The council has outlined a mix of policy actions to help reduce stocks of NPLs, which remain at high levels within banks across EU member states, and prevent their future emergence.

A council study found that all NPLs recorded in Europe, in 2016, amounted to nearly €1trn – the equivalent of roughly 6.7 percent of the EU’s GDP and about five percent of total bank loans.

Officials in Brussels have become concerned that banks with high levels of NPLs can generate negative cross-border spill-overs and affect market perception of the EU banking sector. Resolving NPLs, the council said, can help reduce financial fragmentation and facilitate capital flows.

The council has therefore agreed to tackle the issue as it will “benefit the whole of the EU”. It said that although banks are primarily responsible for restructuring their business models and resolving their NPL issues, NPL stocks in some member states may not decline at a sufficient pace given their current magnitude.

It said incentives for banks to deal with NPLs proactively should be enhanced, whilst avoiding the disruptive effects of fire sales.

The council has highlighted the need for action in bank supervision, the reform of insolvency and debt recovery frameworks, the development of secondary markets for NPLs and restructuring of the banking industry.

It said that given the severity of the recent financial and economic crisis, a number of severely affected banks may not be sufficiently equipped to deal with the observed surge of bad loans.

In its report the council states that “for this reason, some banks, especially small ones, may lack the expertise, capacity, or tools to deal with NPLs on a large scale.” Adding: “Outsourcing of servicing may be an option, but that, in turn, depends on the capacity of the NPL servicing industry and of the costs associated with servicing fees.”

Toomas Tõniste, minister for finance of Estonia, which currently holds the council presidency, said: “Non-performing loans are a problem for the banking industry for which solutions have until now been mainly defined at the national level.

“We need to free up these resources, make our financial system more resilient and prevent the re-emergence of NPL issues in the future.”

The council has agreed to revert to this issue regularly and initially after six months to take stock of the evolution of NPLs in Europe.