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July 11, 2017

ESRB published a report on resolving non-performing loans (NPLs). The report summarizes the NPL situation in the EU, followed by practical guidance on the process leading to NPL resolution, including a synopsis of the available options. Specific areas of interest include incentives for, and potential impediments to, the resolution of NPLs, policy experiences on asset management companies, and the conditions of secondary markets for distressed assets in the EU.

The report noted that the stock of NPLs in the EU banking sectors amounted to 5.1% of total loans at the end of 2016. The elevated NPL stock creates macro-prudential and financial stability issues. The report contains practical guidance for policymakers on the three steps that must be taken to design the overall response to the NPL issue. In the first step, a clear upfront diagnosis of the size and scope of the NPL problem should be made, followed by an operational separation of NPLs from other performing assets of the bank. In the second step, the NPLs of the concerned banks should be subject to valuation and triage, to identify the viable exposures—to be restructured—and the non-viable exposures, which would be liquidated. Additionally, an assessment of the viability of each individual bank following the resolution of their NPLs needs to be made. In the third and final step, the relevant NPLs should be removed from the banking system, whereby banks may need to be restructured, merged, or sold to facilitate their return to sustainable profitability.

 

The report outlines the practical aspects of NPL resolution, highlighting that a comprehensive policy response should be developed further to address the key aspects of this issue. Finally, the report offers specific policy proposals for a range of measures. In the medium term, the work should concentrate on structural issues to improve recoveries from NPLs. However, in the short term, the report recommends that micro-prudential authorities should strengthen their efforts to improve NPL management of banks by:

Enforcing compliance with the EU NPL definition and prudent measurement of NPLs

Requesting regular updates of NPL reduction strategies and setting targets for NPL reduction

Extending the adoption of good practices to all banks

 

Related Link: Report (PDF)

Keywords: Europe, ESRB, EU, NPL, Banking, Report

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