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Non-performing loans

EU taking steps to prevent a build-up of NPLs following the Covid crisis so banks can continue supporting households and businesses.

Previous crises have highlighted the importance of tackling non-performing loans (NPLs) early and decisively, to ensure that individuals and businesses continue to have access to the bank funding they need. On 16 December 2020, the European Commission presented a strategy to do just that, with a series of measures to prevent a build-up of NPLs in the wake of the Covid-19 pandemic.

Supporting economic recovery

Non-performing loans are bank loans that are 90 days or more past their repayment date or that are unlikely to be repaid, for example if the borrower is facing financial difficulties. The 2008 financial crisis led to a build-up of NPLs, as many Europeans were unable to pay back their mortgages or loans. Decisive action taken at national and EU level brought the number down considerably, and on the whole EU banks entered the Covid crisis in good shape. However, the impact of the pandemic on the economy has been so severe that some banks will struggle and the number of NPLs is expected to rise.

The timing and magnitude of this increase is still uncertain, as the extent of the economic damage is as yet unknown. But the latest figures for the first half of 2020 reveal that the downward trend in NPLs has stopped. What is clear is that many European households and businesses, in particular SMEs, have encountered financial problems that may lead to insolvencies. These insolvencies might in turn lead to an increase in NPLs, which could hamper banks’ ability to lend. As the pandemic is mostly hitting firms in sectors that are otherwise generally viable, and will likely rebound once the pandemic subsides, measures are needed to ensure that banks can keep lending, and in doing so support the EU’s economic recovery.

Specific measures

The set of measures the Commission has put forward is intended to prevent a rise in NPLs, while ensuring protection for borrowers. The strategy has four main goals.

• Further develop secondary markets for distressed assets: This will allow banks to move NPLs off their balance sheets, while ensuring stronger protection for debtors. A key step in this process would be the adoption of the Commission's proposal on credit servicers and credit purchasers. Also possible is the establishment of a central electronic data hub at EU level to enhance market transparency.  

• Reform the EU’s corporate insolvency and debt recovery legislation: This will help bring together the various insolvency frameworks across the EU, while maintaining high standards of consumer protection. More convergent insolvency procedures would increase legal certainly and speed up the recovery of value, which would benefit both creditors and debtors.  

• Support the establishment and cooperation of national asset management companies: At EU level, the role of asset management companies (AMCs) is to provide relief to struggling banks by making it possible for them to remove NPLs from their balance sheets and re-focus on lending. The Commission is ready to support Member States that wish to set up national AMCs. It will also explore how cooperation might be encouraged by the establishment of an EU network of national AMCs.

• Implement precautionary measures: While the EU’s banking sector overall is in a much better position than after the financial crisis, economic policy responses still vary from one Member State to another. Given the exceptional circumstances of the current health crisis, it is possible for authorities to implement precautionary public support measures, where needed, to ensure the continued funding of the real economy under the EU’s bank recovery and resolution directive and state aid frameworks.

Read the NPL communication