Featured Product

    ECB Highlights NPL Resolution as Key Policy Issue in Post-COVID Europe

    May 27, 2020

    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

    Featured Experts
    Related Articles
    News

    EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models

    The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.

    June 21, 2022 WebPage Regulatory News
    News

    EP Reaches Agreement on Corporate Sustainability Reporting Directive

    The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).

    June 21, 2022 WebPage Regulatory News
    News

    PRA Consults on Model Risk Management Principles for Banks

    The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.

    June 21, 2022 WebPage Regulatory News
    News

    EC Regulation Amends Standards for Calculating Credit Risk Adjustments

    The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.

    June 21, 2022 WebPage Regulatory News
    News

    BIS Hub Updates Work Program for 2022, Announces New Projects

    The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.

    June 17, 2022 WebPage Regulatory News
    News

    EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.

    June 17, 2022 WebPage Regulatory News
    News

    US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule

    Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)

    June 16, 2022 WebPage Regulatory News
    News

    EIOPA Consults on Review of Securitization Framework in Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.

    June 16, 2022 WebPage Regulatory News
    News

    UK Authorities Issue Regulatory and Reporting Updates for Banks

    The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.

    June 15, 2022 WebPage Regulatory News
    News

    BCBS Issues Climate Risk Principles while HKMA Expresses Its Support

    The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.

    June 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8286