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The total gross book value of NPL portfolios traded in the eurozone hit €66bn in the fourth quarter of 2017, its highest since the data series began in 2015, ECB’s semi-annual financial stability review found. The bulk of that figure came from Italy and Spain where just a handful of chunky portfolios accounted for the majority of the total.
The uptick in sales in Q4 took total transaction volumes for 2017 to €157bn, up 42 per cent year on year. Transactions began to emerge in Greece last year and Cyprus has seen its first NPL sales this year, the ECB said.
However, markets that have been active for a longer period, such as Ireland, are beginning to see deal volumes decline as the number of NPLs decreases.
Across the bloc the proportion of total loans on banks’ books defined as non-performing has declined from 7.5 per cent in mid-2015 to below 5 per cent at the end of last year. That figure masks large disparities, however: in Greece the NPL ratio is still more than 40 per cent, while less than 2 per cent of loans in Germany are non-performing.
Bad loans are, along with weak profitability, viewed as one of the biggest problems facing the European banking sector. An overhang from the region’s crisis, non-performing loans are concentrated in economies that have performed poorly over the past decade, such as Italy’s.
The ECB’s banking watchdog, the Single Supervisory Mechanism, has worked with banks around the region to reduce their stock of non-performing loans and is still considering whether to issue specific guidelines that would advise banks to hold more collateral against their existing non-performing loans.
European bank loans are classified as non-performing when the payment of interest or principal is 90 days late.
In an attempt to avoid a repeat of the crisis, the ECB announced rules this year that will require banks to make full provisions for losses on new non-performing loans from now on. Under the guidelines, it would become more expensive for banks to hold on to loans that turn sour.
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ECB's Financial Stability Review