The joint efforts of banks, policymakers and supervisors have so far proven to be effective in reducing NPLs to a fraction of what they were a few years ago. That is why we are very concerned about legislative proposals which could undermine the effective resolution of NPLs.
Ever since it began supervising banks, addressing the issue of non-performing loans (NPLs) has been a key priority for the ECB and remains so today. The joint efforts of banks, policymakers and supervisors have so far proven to be effective in reducing NPLs to a fraction of what they were a few years ago. That is why we are very concerned about legislative proposals which could undermine the effective resolution of NPLs.
Instead of putting our hard-won achievements at risk during this time of economic uncertainty, we need to continue strengthening the frameworks which enable the reduction of NPLs and prevent their build-up. Households and small and medium-sized enterprises benefit when banks are equipped to maintain lending volumes and healthy balance sheets. And this in turn underpins the health of our economy.
NPLs are a fact of life for banks. There will always be some borrowers who are unable to repay their loans. History has taught us that when NPLs build up and remain unresolved, they weigh on banks’ profitability and take up valuable resources. This ultimately restricts banks’ ability to fulfil their important role of providing households and firms with access to credit, since it prevents them from granting new loans. In the current uncertain economic environment, we need to remain focused on continuing to reduce NPLs and preventing their build-up in the first place.
As early as 2017 we asked banks with high levels of NPLs to develop ambitious and credible strategies to reduce them. In a similar vein, legislators adopted clear provisioning rules based on a uniform provisioning calendar. This facilitates the process of reducing NPLs. Resolving NPLs is costly, takes time and requires very detailed calibration of the pace of reduction to ensure that the financing of the overall economy is not adversely affected.
Banks can manage NPLs in a variety of ways. They need flexibility to choose which approach they should take and which mix of tools is the most appropriate to use. To achieve the right balance, they must take account of the specific characteristics of the NPLs on their books and their individual operational environment. All approaches have something in common: they rely on a well-functioning legal framework that enables NPLs to be resolved.
Our supervisory approach encourages banks to significantly reduce their holdings of NPLs. However, ensuring NPLs are resolved successfully and at an appropriate pace requires much more than a strong, well-calibrated supervisory approach. Policymakers have different tools at their disposal to resolve NPLs, which have also played a significant role in the reductions achieved to date. We have benefited greatly from the significant progress made in removing impediments to the timely resolution of NPLs in the last few years. Policy initiatives that play a crucial role in helping banks make progress towards reducing their NPLs include improvements to insolvency and foreclosure frameworks, more efficient judicial processes, the development of an NPL servicing industry and the creation of broader and deeper NPL markets....
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