European regulators are sounding the alarm about the persistence of bad loans weighing on the balance sheets of banks in the region.
In a report Wednesday on financial risks, the European Union agencies that set rules and technical standards for banks, insurers and markets called for a joint effort to tackle non-performing loans.
“Insufficiently addressed asset quality concerns and persistent high level of NPLs are a significant driver of uncertainty in the EU banking sector,” they said. “Given the widespread, and thus systemic, nature of the significant challenges related to NPL, European supervisors, regulators and legislators should consider pursuing a coordinated, articulated and more decisive approach to this matter.”
Supervisors such as the European Central Bank need to raise pressure on banks to account for and reduce NPLs “in a more proactive and bold fashion,” the report says. Banks should adopt “a conservative provisioning policy, a prudent valuation of loans and collateral” and commit “to a NPL resolution plan with time-bound targets.”
The semiannual report is published jointly by the London-based European Banking Authority, the European Insurance and Occupational Pensions Authority in Frankfurt and the European Securities and Markets Authority, based in Paris.
European banks have the highest ratio of bad loans among developed countries, and progress to lower the share has been slow. According to the report, 5.7 percent of all loans were overdue on average in the first quarter, more than three times the ratio in the U.S. or Japan. The ratio varies widely, from close to 50 percent in Cyprus to around 1 percent in Sweden. High NPL levels are a capital constraint, hurt profits and limit new lending, according to the agencies.
Legislators need to review national codes for tax and insolvency proceedings and judicial resources, which are standing in the way of flushing bad debt out of the system, the agencies said.
“There are significant differences to the legal systems and insolvency frameworks, duration of in and out-of-court proceedings, and to tax regimes, which may impede addressing NPLs,” the report said. “Moreover, a work-overload of the judicial system appears to be another major impediment to a reliable and fast insolvency procedure, especially in countries with high NPL ratios.”
The ECB will soon give banks guidance on how to deal with their NPLs, its supervisory head Daniele Nouy said in a speech in Bratislava on Wednesday. “The guidance constitutes the ECB’s supervisory expectations and serves as a basis for supervisors to evaluate how banks handle NPLs,” she said.