European NPLs through the crisis: a policy review

Author:Nadege Jassaud, Edouard Vidon
Position:Single Resolution Board, Brussels, Belgium
Pages:413-421
SUMMARY

Purpose The unfolding of the financial crisis in parts of Europe has highlighted a number of challenges which can be analysed through the prism of NPLs. These included the discrepancies across supervisory regimes, the limitations of macro-prudential supervision and the diversity of NPL resolution approaches. Design/methodology/approach The authors review policy lessons from the... (see full summary)

 
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European NPLs through the crisis:
a policy review
Nadege Jassaud
Single Resolution Board, Brussels, Belgium, and
Edouard Vidon
Banque de France, Paris, France
Abstract
Purpose The unfolding of the nancial crisis in parts of Europe has highlighteda number of challenges
which can be analysed through the prism of NPLs. These included the discrepancies across supervisory
regimes,the limitations of macro-prudential supervision and the diversityof NPL resolution approaches.
Design/methodology/approach The authors review policylessons from the crisis in dealing with the
NPL problem.
Findings The paper highlights some key recommendationsthe need for intrusive supervision, strong
macro-nancialsurveillance and NPL resolutionapproaches that provide the right incentives.
Originality/value These recommendationscan help inform the current debate regardingregulatory and
structuralinitiatives to tackle NPLs.
Keywords Insolvency, Supervision, Systemic risk, Resolution, Banking crisis, Banking regulation
Paper type General review
1. Introduction
In the wake of the global nancial crisis (GFC), issues surrounding balance sheet quality
have once again come to the forefront. In Europe in particular, the unfolding of the
banking dimension of the crisis has highlighted a number of supervisory and macro-
prudential challenges, which can be analysed through the prism of non-performing loans
(NPLs): the supervision weaknesses prior to the crisis and the role of macro-nancial links
through the crisis.
The establishment of the single supervisory mechanism (SSM) has enabled decisive
progress towards a common approach for NPL resolution. While the European Banking
Authority (EBA) proposed a common denition ofNPLs, the European Central Bank (ECB)
performed a comprehensive balance sheet assessment, and drafted a dedicated guidance to
banks.
Still, growing or persistently large, system-wide NPL stocks raise macroeconomic and
prudential policy concerns. In that respect,the legacy of the crisis is still with us: aggregate
non-performing exposure (NPE[1])ratio for euro area signicant institutions (for total loans
and advances) amounted to 6.4 per cent at end-September 2016 (almost one trillion euros),
equivalent to nearly 9 per cent of the euro area GDP (ECB, 2017). This average conceals
important differences across countries and institutions. Importantly, these are gross
numbers that are met by various levels of provisioning. Yet, and eventhough international
The views expressed in this paper are solely those of the authors and do not represent the policies or
opinions, past or future, of the Banque de France, or of the SRB or any of its board members.
European
NPLs through
the crisis
413
Journalof Financial Regulation
andCompliance
Vol.25 No. 4, 2017
pp. 413-421
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2017-0029
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm

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