Non-performing loans

Credit risk is one of the top three priorities for the ECB's supervisory work. For this reason we pay particular attention to non-performing loans (i.e. loans that are not being repaid, or “bad loans”), which feature prominently on balance sheets of European banks.

What happens to non-performing loans (NPLs) is important for people and businesses as these loans weigh on banks' profitability and absorb valuable resources, restricting their ability to make new loans. Bad loans are also important for society as a whole as problems in the banking sector can quickly spread to other parts of the economy, harming the outlook for jobs and growth. So the ECB supports banks in tackling this issue in line with our responsibility to help ensure the safety and soundness of the European banking system.

Supervision. Explained.: What are non-performing loans?

A major problem

European banks in general had non-performing loans worth around €1 trillion on their books at the end of 2016. The corresponding figure for the biggest banks in the euro area was around €880 billion, which represented nearly 6.2% of the total loan amount (compared with a 2016 average of circa 1.3% for the United States and 0.9% for the United Kingdom).

While the percentage of loans classified as non-performing has since decreased (3.7% of the total loan amount in the first quarter of 2019), Europe has a lot of catching up to do on this front.

ECB Supervisory Banking Statistics provide further details on non-performing loans and the figures for different euro area countries.

A supervisory priority

ECB supervisors monitor the overall level of non-performing loans across euro area banks. They also check whether individual banks adequately manage the riskiness of their loans and if they have appropriate strategies, governance structures and processes in place. This is part of the common supervisory review and evaluation process (SREP) that is carried out for each bank every year. Furthermore, the ECB regularly carries out coordinated exercises to review the asset quality of the banks it directly supervises.

ECB supervisors work together with national supervisors in the NPL High-Level Group to find a consistent and effective way of dealing with bad loans and reducing them, based on best practices. The European Banking Authority also participates in the group as an observer.

As part of this work we have published:

In December 2017 the European Banking Authority produced a set of NPL templates to collect detailed, standardised information on transactions involving non-performing loans. By providing buyers and sellers with more reliable data, these templates should help improve the market for NPLs and ultimately serve as the foundation for further transactions across Europe.

A joint effort

In addition to supervisory action, action in two other areas is needed to tackle the high stock of NPLs. The first is legal action: in some European countries, the available legal tools may not be sufficient or may not allow for the timely resolution of bad loans. The second is action in secondary markets: through these markets banks can transfer the risk of holding NPLs to non-bank investors, but the markets are often underdeveloped.

In July 2017, building on ideas proposed by the ECB, the Economic and Financial Affairs Council of the EU set out an action plan to tackle non-performing loans in Europe. The plan includes actions in all three areas: banking supervision, reforms of insolvency and debt recovery frameworks, and the development of secondary markets. In January 2018 the Commission published the first progress report on the reduction of NPLs.

See the ECB’s Financial Stability Review 2017 for more information on the risk that high numbers of NPLs pose for financial stability and growth and to read about how non-performing loan market failures could be overcome with transaction platforms.

An exchange of views

The initiatives aimed at tackling NPLs have prompted questions about the overall approach, impact and supervisory mandate. The ECB’s responses to related letters from members of the European Parliament are presented below.