10 December 2019

Bruegel: Non-performing loans’ legacy versus secondary markets

Eleven years since the start of Europe’s financial crisis, and the legacy of non-performing loans in the EU, though much smaller, is still a live issue for some member states, writes Joanna Surala.

No doubt success has been achieved as the asset quality of banks in the EU area has improved reaching 3% as of June 2019 (EBA Risk Dashboard – Q2 2019), compared with its peak of approximately 7.5% in 2012 (EBF). The total stock of NPLs held by the banks reduced to EUR 636bn as of June 2019 (EBA Risk Dashboard – Q2 2019). This success has been mainly down to three developments:

Progress, as marked in Fourth Progress Report on the reduction of NPLs and further risk reduction in the Banking Union, on the Council of the EU’s action plan including focus of the European Commission, European Central Bank, European Systemic Risk Board and European Banking Authority on the reduction of non-performing loans.

Banks’ efforts in workout combined with development of special asset management companies and the secondary markets in some member states.

And rather good economic climate over the last few years: positive economic growth, lowering unemployment, low-interest rates and a favourable situation in real estate.

However, the generally positive picture is somewhat twisted when it comes to individual member states. On the one hand, in terms of the NPL ratio Luxembourg, Sweden, the UK, Germany and Finland are doing well. On the other hand, Greece and Cyprus are recording two-digit numbers, followed by Portugal, Italy, Bulgaria and Croatia with the NPL ratios from 6.6% to 5.9% respectively.

As historical cases of effective NPL reductions (e.g. Ireland, Spain, Italy, UK, Germany, Slovenia) have been somehow linked to the secondary markets. Let’s contrast the NPL results with developments on the European loan portfolio market.

To conclude, the further development of secondary markets as well as the application of dedicated solutions like AMCs, asset protection schemes or transaction platforms both at the national and at the EU level seems to be vital in effective NPL problem resolution.

Nevertheless, to make the secondary markets do their job, a good and timely progress on making the foreclosure, restructuring, insolvency and judicial systems work smoothly is rudimentary. No longer should the capacity of the active European loan portfolio market be underestimated for the purpose of deleveraging Europe.

Full article on Bruegel

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