#Banks: Finance minister will discuss a new expert report on non-performing loans

At today’s (11 July) ECOFIN Council European finance ministers will discuss a report on non-performing loans (NPL) in the banking sector. NPLs are a legacy of the financial crisis that still affects the banking industry in the EU and is thought to weaken the measures taken by the European Central Bank. Ministers will set out an agenda for work to address the issue, writes Catherine Feore.

Yesterday, following the Eurogroup Jeroen Dijsselbloem, Dutch finance minister and President of the Eurogroup reported that Sharon Donnery, the deputy governor of the Bank of Ireland who chairs a working group on NPLs in the European Central Bank (ECB) presented the work the ECB has been doing on an insolvency framework.

Dijsselbloem said: “I don't have to tell you how important it is to make progress in dealing with legacy issues in the banking system and to support macro-economic adjustment transmission of monetary policy.”

The number of NPLs have been steadily diminishing over the last 3 -4 years, but the decrease has been slow. It is also thought that the low-hanging fruit has been dealt with and remaining outstanding NPLs were likely to be poor. The picture is also very uneven with ten EU countries still having NPL ratios of over 10%. A senior official told EU Reporter that though the issue is “grounded in national realities,” it has an important European dimension because of the scale of the problem and the risk of spill over and cross exposure to other EU countries.

A senior European official said that there was “no silver bullet” and that the menu of policy options had to be taken together. The report that will be discussed today has four main areas: Enhancing supervisory tools to address the management of NPLs by banks; promoting structural reforms of insolvency and debt recovery frameworks; developing secondary markets in Europe for NPL transactions; and, fostering the restructuring of banking sectors in the context of NPL resolution.

Enhancing supervision

The report calls for the swift implementation of the SSM (Single Supervisory Mechanism within the ECB) guidance on NPLs. There is a proposal to adopt a specific tool for future NPLs, an idea borrowed from the US where an automatic deduction will take place at a certain point.

Promoting structural reforms of insolvency and debt recovery frameworks

There is a general concern for the need to make insolvency procedures more predictable, streamlined and efficient, with a number of proposals including incentivising out-of-court restructurings.

Developing secondary markets in Europe for NPL transactions

It is thought that the main challenge here is to improve the transparency of data available to potential investors. The Commission will be invited to develop a blueprint for the permissible design of asset management companies (AMC) whether private or public, regional or national. The main issue would be to comply to state aid rules.

Fostering the restructuring of banking sectors

It is thought that the current fragmentation of the banking sector can make it difficult to deal with NPLs. Smaller credit institution in particular have difficulty with the cost and administrative burden of restructuring. The report suggests greater use of cross-border and non-banking lending to help meet national credit demand if the national banking sector is weak.

Share this article: