What are NPLs?
Non-performing loans, or “NPLs”, are bank loans that are subject to late repayment or are unlikely to be repaid by the borrower.
The inability of borrowers to pay back their loans was aggravated during the financial crisis and the subsequent recessions. As a result, many banks saw a build-up of NPLs in their books. This was particularly acute in some EU countries.
While the average ratio of NPLs in the EU has decreased by more than one third since 2014, the total volume of NPLs remains high and some countries are making only slow progress in reducing them. High levels of NPLs can weigh on the economic growth of those countries as they reduce banks’ profitability and their ability to lend, particularly to SMEs.
Addressing the risks related to high stocks of NPLs is primarily the responsibility of affected banks and national authorities. However, in a monetary union where the economies of member countries are interlinked and can create spill-over effects, there is also a clear EU interest in reducing current NPL ratios.
National authorities and European institutions need to join forces to address the issue. This was recognised by the ECOFIN Council in July 2017, when finance ministers agreed on an Action plan to tackle non-performing loans in Europe. The plan called upon various institutions – including the Commission – to take appropriate measures to address the challenges of high NPL ratios in Europe.
In line with the ECOFIN action plan, the Commission announced in its Communication on completing the banking union of October 2017 a comprehensive package of measures to reduce the level of NPLs in the EU.
In March 2018 the Commission presented its package of measures to tackle high NPL ratios. The proposed measures aim to speed up progress already made in reducing NPLs and prevent their renewed build-up. The package includes
- A proposal for a regulation amending the capital requirement regulation and introducing common minimum coverage levels for newly originated loans that become non-performing. This measure will make banks set aside funds to cover the risks associated with future NPLs
- A proposal for a directive on credit servicers, credit purchasers and the recovery of collateral. This measure will provide banks with an efficient mechanism of out-of-court value recovery from secured loans and will encourage the development of secondary markets where banks can sell their NPLs to investors and make use of specialised credit servicers
- A Commission services’ staff working document containing a blueprint on the set-up of national asset management companies (AMCs). The document provides non-binding guidance to national authorities on how they can set up AMCs dealing with NPLs.
NPL action plan
By keeping the financing of the economy going, banks have a crucial role to play in mitigating the effects of the COVID-19 crisis. This is vital in order to support the EU’s economic recovery. Given the impact coronavirus has had on the economy, the volume of NPLs is expected to rise across the EU. Depending on how quickly the EU’s economy recovers from the coronavirus crisis, banks’ asset quality – and in turn, their lending capacity – could deteriorate.
Against this backdrop, the Commission on 15 December 2020 presented an action plan, which aims to give Member States and the financial sector the tools they need to address any rise in NPLs in the EU banking sector early on.