NEWS Release - Resolving Europe’s NPL burden: challenges and benefits
Keynote speech by Vítor Constâncio, Vice-President of the ECB, at an event entitled "Tackling Europe's non-performing loans crisis: restructuring debt, reviving growth" organised by Bruegel, Brussels, 3 February 2017
I am grateful for this opportunity to speak on the important issue of NPLs in European banks at the invitation of Bruegel, a think-tank doing such significant work in shaping economic thinking in Europe. My remarks today will be on the euro area non-performing loan (NPL) problem and on the policy response that would be needed from a macroprudential perspective. I will first outline the size and scope of the NPL problem. I will then put the NPL problem into a microeconomic and structural context, focusing on the reasons why it has developed this way and what the impediments are to an exclusively market-based solution to the problem. With this in mind, I will move on to the range of necessary and feasible solutions, underlying in particular the role of securitization schemes and the creation of Asset Management Companies (AMC) to achieve an orderly and fast resolution of NPLs.
The NPL problem is one of the main reasons behind the low aggregate profitability of European banks. Let me recall here that the return on equity of euro area banks has hovered around 5%, which does not cover the estimated cost of equity. It is important to keep in mind that the issue is not about the robustness of balance sheets as capital and provisions have significantly increased since 2012. Indeed, whereas CET1 ratio was 7% in 2007, it reached 9% in 2012 and is now 14%. Including provisions and collateral, the NPL coverage ratio stands at 82% on average, both for the group of six countries with higher NPLs and for the euro area as a whole.
Asset quality issues have been brought to the fore by the global financial crisis. In the euro area, NPL ratios stood at low or manageable levels prior to the crisis. At the same time, the NPL problem has deep structural reasons that were further amplified with the start of the financial and economic crisis. In fact, the surge in NPLs further revealed the limited ability of large parts of the euro area banking system to deal with distressed debt.
In the euro area, the average NPL ratio peaked at 8% in 2013 (see Chart 1).[1] As the economic recovery took hold, GDP growth resumed and unemployment started to decline, this ratio started to fall. The reduction in NPLs has, however, been slow and heterogeneous. The ratio of NPLs is still at two digit level in six i euro area countries: Cyprus, Greece, Italy, Ireland, Portugal and Slovenia. Banks directly supervised by the ECB, still held €921 billion of such troubled loans at the end of September 2016, representing 6.4% of total loans and equivalent to nearly 9% of the euro area GDP.[2]
The NPL outlook is also very diverse across the euro area. In two countries, Cyprus and Greece, about one-half of total loans are not performing, accounting for about one-third of total bank assets. Four countries report NPL ratios of close to 20%. On the other end of the spectrum, many countries maintain NPL ratios of less than 3%. Despite this heterogeneity, NPLs are a problem with a clear European dimension, as even those countries where banks do not struggle with asset quality, are likely to be affected by spillovers, both financial and real.
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