October 01, 2018

ESRB published a report of the Advisory Scientific Committee (ASC) on approaching nonperforming loans (NPLs) from a macro-prudential angle. This ASC report is intended to contribute to the mandate assigned to ESRB, by elaborating on the foundations for policy action in the NPL domain and some of the key elements and principles relevant for designing the policy package from a macro-prudential perspective.

The report first identifies the imperfections (externalities, economies of scale and coordination failures, institutional distortions and moral hazard vis-à-vis the safety net) that call for policy action in relation to the NPL problem. Special emphasis is placed on the mechanisms that can turn this into a macro-prudential problem. The report then establishes a mapping between the imperfections identified and the list of potential preventive and corrective policies in relation to NPLs and discusses the policy trade-offs that are relevant from a macro-prudential perspective. It concludes with a further elaboration of the trade-offs and policies that need to be taken into account in determining the optimal speed and form of resolution of NPLs once they have been accumulated.

The accumulation of NPLs on the balance sheets of EU banks in the aftermath of the global financial crisis has caught the attention of European authorities in the last few years. NPLs become an issue of macro-prudential concern if they are a source of systemic risk and a threat to financial stability. The policy considerations in this report are meant to contribute to the ongoing policy discussions and should not be regarded as specific proposals for formal ESRB warnings or recommendations.

 

Related Link: Report (PDF)

 

Keywords: Europe, EU, Banking, NPLs, Macro-Prudential Policy, Systemic Risk, ESRB 

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