EBA Report Examines Progress in Addressing Nonperforming Loans in EU
EBA published a report that examines the progress toward addressing the nonperforming loan (NPL) issue in Europe. The report also takes stock of ongoing initiatives to tackle the NPL issue at the EU and the member state levels, identifies challenges to tackle the remaining NPL stock, and indicates possible areas where further action is needed. The report shows that NPL volumes have decreased by 50% since 2015, but country dispersion remains wide. The impediments to resolving NPLs remain significant in a few countries, particularly in the countries with higher NPL ratios.
The weighted average NPL ratio is 3% as of June 2019, compared with 6% in June 2015. This is the lowest ratio since EBA introduced a harmonized definition of NPLs across European countries. The report identified three pillars that determined the overall reduction in NPLs: supervisory attention and political determination to address the NPL issue effectively, efforts of banks to enhance NPL management capabilities, and positive economic growth. IFRS 9 data of on-balance-sheet and off-balance-sheet items also confirm the significant improvement achieved in asset quality. The share of stage 1 assets has been increasing relative to other stages and there was a limited migration from stage 1 to stages 2 or 3. To assess early warning signals, the report looks into the percentage of performing past-due loans and the movements toward a stage of lesser quality (for example, from stage 1 to stage 2 or 3). The share of stage 3 financial assets as of June 2019 was the highest in Greece (41%) and Cyprus (31%), followed by Portugal (9%).
Despite the significant improvement, dispersion of NPL ratios across countries remains wide. As of June 2019, Greece reported the highest NPL ratio (39.2%), followed by Cyprus (21.5%), while five additional countries had a NPL ratio above 5%. In comparison, in June 2015, 17 countries had reported NPL ratio above 5%, of which 10 countries had a double-digit ratio. Countries with high NPL ratios have larger share in past-due buckets of one year and more. These older NPLs are harder to cure, considerably devalued, and pose a significant risk to the banks that have an increased share of assets on their balance sheets. The differences in the speed recovery procedures across countries, caused by an inefficient legal framework and the lack of a market for NPLs, are the responses most often cited by the banks as impediments to the further resolution of NPLs. Furthermore, the legacy assets are still material and ongoing monitoring is required in the light of a weakening economic environment.
This is the second thematic report on NPLs and it follows the report that was published in July 2016. This report is based on supervisory data of asset quality metrics and is accompanied by a data visualization tool that provides a country-by-country analysis of the key asset quality metrics.
- Press Release
- Report on NPLs (PDF)
- Data Visualization Tool
- Statistical Annex (XLSX)
- First Report on NPLs (PDF)
Keywords: Europe, EU, Banking, NPL, Credit Risk, NPE, IFRS 9, 90 Days Overdue, EBA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
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