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Speech by Bank of Greece Deputy Governor John (Iannis) Mourmouras at the 5th BSCEE-BCBS-FSI high-level meeting on global & regional supervisory priorities of the Bank for International Settlements in Basel: “NPL measurement, identification and resolution”

18/10/2017 - Speeches

“NPL measurement, identification and resolution”

Introductory remarks by
Bank of Greece Deputy Governor
John (Iannis) Mourmouras
at the Bank for International Settlements on the occasion of the Fifth BSCEE-BCBS-FSI high-level meeting on global and regional supervisory priorities

Basel, 18 October 2017

1. Introduction: the harsh facts

As the Chair of the session on “NPL measurement, identification and resolution”, let me welcome you all.

Some have called NPLs the Achilles’ heel of the European banking system; others the elephant in the room. Only last week, both ECB President Mario Draghi and ECB Supervisory Board’s Chair Danièle Nouy touched upon the issue, the first in a speech and the second replying to European Parliament President Antonio Tajani on the rule change that will force banks to make provisions against 100% of any new loan that is declared non-performing (so-called new NPL), in other words tackling the issue of the flow of NPLs and preventing new NPLs from being added to the existing stock of NPLs. Madame Nouy pointed out that addressing NPLs has always been a key priority for the SSM and President Mario Draghi stressed that the rule change will be subject to a public consultation until 8 December.

It is fair to say that the large stock of NPLs that has been part of the “legacy” of the eurozone crisis remains an unresolved issue, having stood at €865 billion at the end of the first quarter of 2017 (or 6% of total lending) and previously having reached almost €1 trillion at the end of 2016 or 5.1% of total outstanding loans. Undoubtedly, the good news is that the ratio of NPLs has followed a steady downward trend, decreasing in the first quarter of 2017 by 30 basis points to 4.8% of total outstanding loans. Even in my country, Greece, which is an outlier for NPLs (with a ratio of 46%), and this is anecdotal evidence, for Q3 this year NPL flows have for the first time shown improved dynamics, as the rate of reduction in existing NPLs is higher than the rate of formation of new NPLs.

The average picture masks sharp divergences across EU countries. At the end of December 2016, the two countries which had to implement strict capital controls, Greece and Cyprus, reported NPE ratios of 46% and 45%, respectively (namely, NPEs less than 90 days past due, NPLs: more than 90 days past due). Bulgaria, Croatia, Hungary, Ireland, Italy, Portugal, Slovenia and Romania all report ratios between 10% and 20%, while other EU countries report ratios below 7% (including 8 countries with ratios below 3%). Also, among Balkan countries, Serbia has a ratio of around 15%, but made substantial improvements in terms of provisioning (coverage ratio of 69%), while in Albania the ratio stood at around 17% with a coverage ratio around 65%.

European countries also differ in terms of the sectoral distribution of NPLs. In every country with a high NPL level, there is a high rate of NPLs in the loans-to-SMEs category.

In countries with relatively high NPL ratios, the coverage ratio has increased since June 2015, and today stands at around 45%. However, the country dispersion of the coverage ratio remains significant across countries, with values ranging from 28% to 66%.

2. NPL determinants

There is by now a large body of literature mainly empirical studies that try to identify the economic and structural drivers of NPL stocks, which effectively verifies the two transmission channels with regard to the rise of NPLs, that is, the bank balance sheet channel and the borrower balance sheet channel.

To save time I am not going to comment on the drivers per se behind NPL ratios, these are well documented in the literature, including real GDP growth, asset quality, idiosyncratic shocks, structural drivers, as you all know.

3. Strategies for resolving Europe’s NPL issue

Of paramount importance are the various strategies put forward in the literature and in practice, many of them already adopted to resolve Europe’s NPL issue. I will restrict myself to only a few remarks as food for thought, and then leave it to the experts here to offer a more detailed and thorough analysis!

Firstly, we must recognise that it will take time to solve the problem of NPLs in Europe and secondly that, given the large toolkit, it appears that there is no single silver bullet for the whole of Europe. I don’t have to remind you that in the United States or Japan, where the issue of NPLs has been more effectively resolved, NPLs constitute only 1.5% of total outstanding loans. But these countries, and especially the US, have a deep private market for NPLs together with a robust legal operational framework, on both of which Europe is lagging behind.

There is a spectrum of options ranging from: on-balance sheet ones like, for instance, the internal workouts by originating banks (various restructuring options) to a number of securitisation schemes, the formation of national asset management companies (AMCs) and – at the other end of the spectrum – off-balance sheet ones, such as outright loan sales.

For instance, on national AMCs or ʽbad banks’, Germany, Ireland, Slovenia and Spain used tools to manage banking crises with a focus on loans backed by real estate. All the above AMCs helped stabilise their countries’ financial sector during the crisis, they have many differences with regard to the size of the asset portfolios purchased, but also have one common feature: namely, state support.

On the contrary, Greece, by force of circumstances, followed a different approach to tackle its NPL problem without any financing assistance from the public sector, where the commercial banks have agreed to a timeframe and a number of targets using as a toolkit external management, direct sale, transfer of NPLs, write-offs, etc.

Clearly, there are key areas requiring EU-wide action. For example, a blueprint for national AMCs in the euro area – essentially, a manual for setting up an AMC – would save authorities time and money. In addition to clarifying in detail how AMCs can be made compatible with the EU legal framework, such a blueprint should identify international best practices for key aspects of AMCs such as eligible asset classes, participation requirements, asset valuation, capital and funding structures and governance.

Finally, one word only on securitisation schemes: Securitisation schemes have the potential to kick-start the NPL secondary market in Europe, but may require public intervention to signal that governments are determined to implement structural reforms that will improve asset valuations, including NPL trading platforms or clearing houses with the objective to increase NPL transparency, stimulate transaction activity and reduce information asymmetry (the so-called ‘market for lemons’).

Thank you very much for your attention.


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