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A macroeconomic perspective on non-performing loans (NPLs)
[...] Though showing causality is fraught with difficulties, the comparative analysis across EU countries grouped according to the intensity of their NPL problems shows that, over the last five years, Member States with high NPL ratios have also experienced below average economic growth. These economies have displayed the most visible contraction in bank lending to both non-financial corporations and households. At the same time, the group of Member States experiencing the most severe problems with NPLs have also seen their investment ratios fall below the EU average. This indicative evidence points in the direction of an important nexus between NPLs and the contraction in bank lending and investment activities.
It is important to stress that the recent financial turmoil affected both credit demand (via the depth of the recession) and credit supply (via the adjustment in the banking sector), and it is very difficult to provide evidence on causality. Instead, it seems fair to say that both banking developments (NPLs, credit) and real developments (investment) are endogenous. Even acknowledging the difficulties in showing causality, as already stressed, it seems plausible that persistently high NPLs in a number of Member States can be a factor contributing to the currently sluggish nature of the recovery. Therefore, taking decisive policy action to reduce NPLs would be beneficial for growth.
Finally, it is important to recognize that in a deeply economically integrated area like the EU, and particularly the euro area, financial systems are also highly interconnected across borders. This means that problems with NPLs are likely to constrain credit supply and economic growth not just in the affected Member States but also in the euro area as a whole. The potential broader economic and spillover effects would therefore require not only undertaking important structural measures at Member States level but also, importantly, a coordinated European approach to the NPL issue. Obviously, any such common approach would have to comply with the current EU legal framework. Any short-term solutions would need to be complemented by more long-term reforms to enhance the performance of secondary markets for NPLs and the institutional environment for their resolution. This could go a long way in addressing the concerns explained in this analysis.
II. Unlocking investment in intangible assets in Europe
III. Assessing the price and non-price competitiveness of the euro area
Quarterly Report on the Euro Area (QREA), Vol. 16, No. 1 (2017)