European NPLs through the crisis:
a policy review
Single Resolution Board, Brussels, Belgium, and
Banque de France, Paris, France
Purpose –The unfolding of the ﬁnancial 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
Findings –The paper highlights some key recommendations–the need for intrusive supervision, strong
macro-ﬁnancialsurveillance 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
In the wake of the global ﬁnancial 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-ﬁnancial 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 deﬁnition ofNPLs, the European Central Bank (ECB)
performed a comprehensive balance sheet assessment, and drafted a dedicated guidance to
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)ratio for euro area signiﬁcant 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.
Journalof Financial Regulation
Vol.25 No. 4, 2017
© Emerald Publishing Limited
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