Tackling non-performing loans

This week the Commission presented its non-performing loans (NPLs) strategy, a plan to respond to a possible build-up of NPLs resulting from the COVID-19 pandemic. It intends to provide Member States and the financial sector with tools to address NPLs early on.

This is the first strategy that I’ve launched as Commissioner, and it’s a crucial one as we look towards the recovery from the COVID-19 crisis.

The EU’s banking sector is in a much stronger position than it was during the financial crisis, thanks to the various post-crisis reforms. This time banks are part of the solution: they mitigated many of the economic impacts of the crisis by keeping credit flowing. They have been backed up by governments, regulators and supervisors through support measures such as SME loan schemes, payment moratoriums and regulatory flexibility.

As we look to build towards the economic recovery, businesses and households must continue to be able to borrow and receive support from banks.

But while maintaining financial flows, banks have become more exposed to financially vulnerable borrowers. If we see a build-up of NPLs on bank balance sheets, it could prevent them continuing to lend – which would undermine the economic recovery.

The effects of NPLs have been limited up to now. EU banks had an NPL ratio of 2.8 percent at the end of June this year – slightly up from the low point of 2.6 percent at the end of 2019 but still down from 5.1 percent in late 2016.

However, the European Central Bank as well as the European Banking Authority have warned that we could see new NPLs increase over the coming years. The last crisis and recovery showed that NPLs can get in the way of bank lending and slow down economic growth.

We have an opportunity to act now and be prepared – learning lessons from the past.

The NPL strategy will help Member States and banks to tackle NPLs decisively and early. 

The actions proposed under this strategy are the result of discussions with Member States, experts and regulators.

They fall into four main categories.

First is to continue the development of secondary markets for NPLs. This will allow banks to move NPLs off their balance sheets and focus on new lending to fund the recovery. At the same time, we want to ensure strong borrower protection across the single market. 

Second is a proposal for convergence of insolvency and debt recovery frameworks across the EU. The idea is to increase legal certainty and efficiency, benefiting both creditors and borrowers, while maintaining high standards of consumer protection. 

Thirdly, the strategy will support the establishment of asset management companies or AMCs by Member States. It will be up to Member States if they want to set up a national AMC or not. The Commission will give support if a Member State chooses to set up an AMC, and will coordinate a cross-border network of AMCs at EU level. National AMCs could provide relief to banks struggling with NPLs, enabling them to re-focus on new lending instead of managing NPLs.

Finally, given the exceptional circumstances of the health crisis, authorities have the possibility to implement precautionary public support measures where needed, to ensure the continued funding of the economy. The EU’s Bank Recovery and Resolution Directive and state aid frameworks allow measures in exceptional circumstances, as long as such support remains targeted and limited.

This strategy aims to achieve a balance between enabling banks to recover the value of loans they have provided, and protecting European citizens and businesses. It represents a continuation of the measures over the past number of years to build up the strength and resilience of the European banking sector.

As we learned from the last financial crisis, preventing a build-up of NPLs on banks’ balance sheets will be essential in enabling banks to maintain their capacity to lend and, in turn, contribute to the recovery and economic growth.