As part of a Research Bulletin on the recent policy-relevant work, ECB published an article that examines the lessons learned from past crises for nonperforming loan resolution in the post COVID-19 period. As a result of the COVID-19 pandemic, the economy has come to a sudden halt. This is likely to bring about high levels of nonperforming loans. High levels of such loans are problematic because they impair bank balance sheets, depress credit growth, and delay economic recovery. The article highlights that designing effective nonperforming loan resolution policies for the post-COVID-19 world is a key forward-looking financial policy issue for Europe.
In this article, the authors use a new database covering nonperforming loans in 88 banking crises since 1990 to find out the lessons learned. The authors use the “local projections” method to assess the link between nonperforming loan resolution and post-crisis output dynamics, while controlling for their co-dependence. The data show that dealing with nonperforming loans is critical to economic recovery, as high and unresolved nonperforming loans are associated with deeper recessions and slower recoveries. The results of the analysis highlight forces that can make nonperforming loan resolution after the COVID-19 events different from that after the 2008-2012 crisis. Compared with the 2008 crisis, some factors are conducive to nonperforming loan resolution this time: banks have higher capital, the forward-looking IFRS 9 accounting standards can help in recognition of nonperforming loans, and the COVID-19 crisis was not preceded by a credit boom. However, other factors that could make resolution of nonperforming loans more challenging are substantially higher government debt, lower bank profitability, and weaker corporate balance sheets.
If the economic downturn proves temporary, many post-COVID-19 nonperforming loans may relate to viable illiquid firms, rather than unviable zombie firms. In contrast, if the economic recovery from the pandemic is slow and protracted, credit losses from corporate distress will rise and could overwhelm banks, further complicating nonperforming loan resolution. Thus, the analysis concludes that, given the importance of nonperforming loan reduction for economic recovery and many countries’ historical difficulties in implementing effective measures related to nonperforming loans, designing effective nonperforming loan resolution policies for the post-COVID-19 world is a key forward-looking financial policy issue for Europe today.
Related Link: Article on COVID-19 and NPLs
Keywords: Europe, EU, Banking, Credit Risk, NPLs, IFRS 9, COVID-19, NPL Resolution, ECB
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleEBA on Extending Large Exposure Limits for French Systemic Banks
The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA
The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.
The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.
The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.
In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.
The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.
The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.
The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).
EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.