Sonntag, 17.12.2017 18:38 Uhr

Various levels of non-performing loans ratios

Verantwortlicher Autor: Carlo Marino Rome, 17.07.2017, 11:45 Uhr
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Rome [ENA] The Italian Press Agency (ANSA) reported on 14th of July that «Italy's public debt hit a new high of 2.278 trillion euros in May, 8.2 billion euros higher than May. At around 132% of GDP, Italy's public debt is the second-biggest in the eurozone after Greece's. Under EU treaties, Italy must progressively reduce its debt-to-GDP ratio to 60%.». A related issue is unquestionably the problem of non-performing loans.

On the report of a document drafted by the Economic Governance Support Unit (EGOV) of the European Parliament, in the EU the average rate of non-performing loans is slowly decreasing, from 6.4% in December 2014 to 5.9% at the end of September 2015. However this level remains high. As comparison, the World Bank reported NPL ratios of less than 2% for the United States and Japan at the end of 2015. Reducing NPLs seems crucial in order to support credit growth because it is vital for small-medium enterprises that are more reliant on bank financing. Reducing NPLs fosters corporate restructuring and in general diminishes the private sector debt menace.

Non-performing loans resolution would allow the debt of viable firms to be restructured while hastening the winding down of unviable firms. Moreover a fast non-performing loans resolution may boost monetary policy transmission, i.e. banks that are concerned about capital adequacy and rising loan loss provisions are indeed likely to be less responsive to changes in the policy rate.There are different levels of NPL ratios and coverage ratios in the euro area, across Member States, sectors, and groups of banks.

The harmful impact of NPL on growth is undeniable and there are various kinds of measures applied across Member states to address the issue of non-performing loans: transferring NPL to dedicated bad banks, developing a secondary market for NPL, strengthening insolvency frameworks, as well as improving supervision and changing tax rules. In a substantial number of Member States non-performing loans can pose risks of cross-border spill-overs in terms of the overall economy and financial system of the EU and alter market perceptions of the European banking sector as a whole, especially within the Banking Union.

Since the start of the crisis, the distribution of NPL has been extremely unequal among Member States, with crisis-hit countries suffering major increases in NPL ratios. At the end of September 2015, the two countries which had to implement strict capital controls, Greece and Cyprus, reported NPL ratio of more than 40%1. Bulgaria, Croatia, Hungary, Ireland, Italy, Portugal, and Romania all report gross NPL ratio between 10% and 20%2. According to the EBA, among those countries, five reported an increase in NPL ratio in the third quarter of 2015: Greece (+1.5 pp), Cyprus (+0.4 pp), Portugal (+0.4 pp), Hungary (+0.1 pp), and Italy (+0.1 pp).

Accounting practices may also be different across jurisdictions and have some impact on the levels of NPL. Maintained by an IMF Staff Discussion Note published in September 2015, NPL represent a drag on economic activity, particularly for countries that depend on bank financing, as is the case in the euro area. High NPL diminish profitability, increase funding costs and tie up bank capital, which negatively impact credit supply and eventually growth. More specifically, the presence of non-performing debt on banks' balance sheets weighs on their ability to lend to the real economy. Actually NPLs imply higher provisioning needs, which in turn lower banks net operating income.

Profits are further reduced by the increased amount of human resources needed to monitor and manage high NPL stock. NPLs are risky assets which attract higher risk weights than performing loans. High NPLs tie up banks' resources and crowd out new credit. IMF ( International Monetary Fund) calculations indicate that given the current level of impaired assets a timely resolution could release as much as € 42 billion (or 0.5 % of selected countries 2014 GDP) of additional capital, which could unlock new lending of more than 5 percent of GDP.

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