ECB finds big differences in how eurozone deals with NPLs

12/9/2016

By Laura Noonan

The European Central Bank has published new research highlighting significant discrepancies in the way eurozone countries deal with bad loans, as it asks banks for their views on new rules to harmonise practices.

Non-performing loans are one of the biggest hangovers from the eurozone financial crisis, with countries such as Italy, Greece and Cyprus afflicted by stubbornly high levels of bad debt.

Investors in banks have been frustrated by different definitions and treatments across the eurozone, something that the ECB first tried to tackle with a standard definition for NPLs in the 2014 stress tests.

Now it is going one further, with standardised supervisory practices for how to handle NPLs, which banks have until November 15 to submit their views on. The guidelines will be non-binding, but banks that do not follow them may face “further supervisory action”, officials said.

Ahead of beginning that consultation, the ECB did a “stock taking” exercise on how bad loans were handled in eight countries including some of those hit worst by the eurozone crisis, including Portugal, Italy, Spain, Cyprus, Greece, Italy and Ireland. It also included Germany.

The review found the biggest differences in supervisory guidance for how bad loans were recognised and classified, how they were measured and provisions were calculated.

Smaller differences were also found in supervisory guidance for valuing collateral. On-site and off-site supervisory practices and methodologies were found to be largely harmonious across the eight.

“There are of course some differences but some of those relate to the fact that different countries are in a different places re the macro economic cycle,” said Sharon Donnery, the Central Bank of Ireland official who chaired the ECB’s working group. “The purpose of the stock take is to identify those and allow people to consider whether those issues should be addressed or not.”

The stocktake will now be carried out on the other 10 eurozone countries.

Generally, the ECB noted that while it was clear that national authorities have “done a good job in engaging” with NPLs, “there is also still room to give further guidance to banks on NPLs, to monitor the implementation of that guidance and to take steps should banks fail to comply”.

“It is clear that banks can, and in many cases should, be doing more to reduce the level of non-performing loans,” said Ms Donnery, stressing that the management of NPLs should be a “key priority” for bank management.

The new guidelines being proposed would require all banks with a high level of NPLs to establish a “clear strategy” to manage and reduce their NPLs. That strategy will include targets for individual portfolios, as well as a “detailed implementation plan”. The average level of NPLs across the banks supervised by the ECB is 7 per cent.

Ms Donnery described the development as a “further step on a medium-time journey” to resolve the eurozone’s NPL problem.

Significant differences in legal systems were also noted, with foreclosure/debt enforcement cited as an “obstacle” to NPLs in three of the eight countries and the judicial system cited as an obstacle in all eight countries bar Germany and Spain.

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