Non-performing loans

Credit risk is one of the top three priorities for the ECB's supervisory work. Given the high stock of bad loans on the balance sheets of European banks, non-performing loans (NPLs) are a particular focus of attention.

What are non-performing loans?

What happens to NPLs is important for people and businesses as they weigh on banks' profitability and absorb valuable resources, restricting their ability to make new loans. NPLs 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 tackling this issue in line with our responsibility to help ensure the safety and soundness of the European banking system.

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 is around €880 billion, which represents 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). Meanwhile, six euro area countries registered double-digit NPL ratios at the end of 2016: Greece (45.9%), Cyprus (37.8%), Portugal (19.5%), Ireland (15.9%), Slovenia (15.4%) and Italy (15.2%).

While a precise picture of NPLs would require taking account of provisioning and collateral, Europe undoubtedly has a lot of catching up to do on this front.

A developing stance

The ECB's stance on non-performing loans has developed since the 2014 “health check” of directly supervised banks. We recognise the necessity of creating a level playing field and involving all stakeholders. A high-level group has been set up on this issue, comprised of representatives of national supervisors and the ECB, with the European Banking Authority acting as an observer. Its job is to find a consistent and effective way of dealing with bad loans and lowering their number, based on best practices.

The European Banking Authority has prepared 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.

EBA press release on NPL templates

Some key milestones

A key milestone is the guidance to banks on non-performing loans published in March 2017, which provides information on how banks are expected to manage NPLs. This guidance is the outcome of a thorough process involving a public consultation. Here are the main related documents:

In October 2017 a draft addendum to the guidance was published – it is also the subject of a public consultation. The addendum is meant to reinforce the guidance and focuses on new NPLs, i.e. loans which turn bad as of January 2018. More specifically, it is designed to encourage timelier provisioning.

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.