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

    APRA Proposes to Increase Transparency of Banking Data

    APRA announced that it is resuming consultation on the confidentiality of data submitted to APRA by the authorized deposit-taking institutions.

    September 29, 2020 WebPage Regulatory News
    News

    US Agencies Finalize Interim Final Rules Issued Amid Pandemic

    US Agencies (FDIC, FED, and OCC) finalized two rules, which are either identical or substantially similar to the interim final rules in effect and issued earlier this year.

    September 29, 2020 WebPage Regulatory News
    News

    EIOPA Consults on Use of Risk Mitigation Techniques Under Solvency II

    EIOPA is consulting on a supervisory statement on the use of risk mitigation techniques by insurance and reinsurance undertakings.

    September 29, 2020 WebPage Regulatory News
    News

    EC Deems UK Framework for CCPs Temporarily Equivalent to EMIR Rules

    EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).

    September 28, 2020 WebPage Regulatory News
    News

    ESMA to Recognize Three Central Counterparties from UK

    ESMA announced that it will recognize three central counterparties (CCPs) established in the UK as third-country CCPs, from January 01, 2021.

    September 28, 2020 WebPage Regulatory News
    News

    PRA Publishes Version 02.04 of PRA110 Liquidity Metric Monitor Tool

    PRA published Version 02.04 of the PRA110 liquidity metric monitoring tool (PRA110 LMM tool).

    September 28, 2020 WebPage Regulatory News
    News

    BoE and FCA Encourage Switch to SONIA in Interest Rate Swap Markets

    BoE and FCA are supporting and encouraging liquidity providers in the sterling swaps market to adopt new quoting conventions for inter-dealer trading based on SONIA, instead of LIBOR, from October 27, 2020.

    September 28, 2020 WebPage Regulatory News
    News

    Bundesbank Updates Supporting Information for SHS Reporting

    Deutsche Bundesbank published special schema files for securities holdings statistics (SHS), along with a document on the XML format description.

    September 28, 2020 WebPage Regulatory News
    News

    LEI ROC Confirmed as Governance Body for OTC Derivatives Identifiers

    FSB confirmed the Regulatory Oversight Committee (ROC) of the Global Legal Entity Identifier System (GLEIS) as the International Governance Body for the globally harmonized identifiers used to track over-the-counter (OTC) derivatives transactions, with effect from October 01, 2020.

    September 25, 2020 WebPage Regulatory News
    News

    FCA Consults on Regulation of International Firms in UK

    FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.

    September 25, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5863