How to cleanse NPLs from EU banks’ balances?

Since the financial crisis, banks have accumulated about a trillion euro’s worth of non-performing loans (NPLs) on their balance sheets. The high levels of NPLs in Italy, Greece and Portugal, for example, constrain their banks’ lending abilities and cause delays in economic recovery. Various potential private and public solutions have been put forward to resolve the problems caused by NPLs but they persist, despite some improvement in recent quarters. During a CEPS lunchtime meeting at the end of September, panellists Piers Haben (EBA), Ramón Quintana Aguirre (ECB), Stefano Del Punta (Intesa Sanpaolo), and Massimo Massimilla (Algebris Italy) discussed resolving NPLs and the need for further public interventions.

Banks can reduce their stock of NPLs in various ways. Depending on the type of NPL portfolio and a bank’s capacity, a bank-specific strategy should be chosen. Whether it is optimal to keep the NPLs or to sell them to investors or a public asset management company depends on a bank’s capacity to maximise the recovery value. Indeed, smaller banks do not often have the staff or the knowledge to recover the most from NPLs themselves, in which case the sale of NPLs to investors should be the preferred strategy. Investors in NPLs often require high returns and are small in number. In order to attract more investors, supervisors are improving the information they give to potential investors. There is, however, still room to improve the resolvability of NPLs, and especially to foster the efficiency of the judicial system and insolvency law.