Any progress on European NPLs?

NPLs in the balance sheets of European banks have been a topic for several years now. There have been discussions, calls for help from top-supervisors (click here for more), and very much work put into this topic. The consideration was and is that too high NPL-ratios disturb the financing of the real economy and in the end impair growth in Europe.

The Council of the European Union finally agreed in July 2017 on a comprehensive set of measures set out in the “Action Plan to Tackle NPLs in Europe” (click here for more). In March 2018 the Commission presented a dedicated and comprehensive package of measures to further reduce NPL stocks (click here for more).

The Commission has now (November 28, 2018) published its third progress report on the reduction of NPLs (click here for the REPORT) along with the progress report on the Capital Markets Union of the same date.

NPL ratios continued to decline in the first half of 2018, following the significant overall trend of improvement over recent years. The latest figures show that the gross NPL ratio for all EU banks further declined to 3.4 % (Q2-2018), down by 1.2 percentage points year-on-year.

While NPL ratios have fallen in nearly all EU member states, there continue to be significant differences between member states: At the end of Q2-2018, 12 member states had low NPL ratios of below 3 %, while there are still some with considerably higher ratios – 3 member states had ratios above 10 %.

According to the Council this reduction in NPL ratios has been facilitated by determined action of bank managements and policymakers. This was particularly the case in EU member states with relatively high NPL levels. The Council draws the conclusion that the environment in which banks can work out their NPLs has improved significantly since the crisis. This was in part supported by a better and clearer regulatory framework. Banks have furthermore enhanced their internal capacity to manage and resolve NPLs and/or availed themselves of dedicated stand-alone or external servicing entities.

Council identifies a steady growth in NPL sales, supporting the evolution towards a more mature NPL resolution environment. But it also emphasises that a truly sustainable solution for the remaining NPL problem in Europe depends on putting further effort into innovative and collaborative approaches.

The Council of the EU Comission even sees management of NPLs as being at an inflection point: The commercial, technological and regulatory advances are falling into place. But Council underlines they need to continue to be supported by targeted policy decisions, both at national and European level, since NPLs continue to pose risks to economic growth and financial stability.

The Council also presents the detailed stocktake for the Action Plan’s different elements, i.e. the strides that have been made and those that are yet to come.