ESRB publishes report on macroprudential approaches to non-performing loans

28 January 2019

The European Systemic Risk Board (ESRB) has today published a report on macroprudential approaches to non-performing loans (NPLs). The report focuses on the role that macroprudential policy can play in preventing system-wide increases in NPLs and/or in strengthening banks’ resilience to such increases, in response to an EU Council request.[1]

The emergence and accumulation of NPLs become a systemic problem when they affect a considerable part of the financial system, threatening its stability. In the European Union, systemic concerns arose from the abnormally high proportion of NPLs which accumulated on banks’ balance sheets during the crisis and persisted afterwards.

The report identifies the main triggers, vulnerabilities and amplifiers that can drive system-wide increases of NPLs, drawing on the experience of ESRB members, especially those from Member States in which such increases were observed in the aftermath of the recent crisis. It highlights the business cycle and asset price shocks as two of the main drivers, but also acknowledges the role played by vulnerabilities built up before the crisis – such as excessive credit growth, high indebtedness and banking practices – and structural factors such as weaknesses in the legal and judicial system.

In terms of macroprudential policy approaches, the report concludes that while no fundamental changes to the existing macroprudential toolkit seem to be required, some refinements should be considered. In particular, further work is needed in areas such as the use of sectoral capital buffers and the development of borrower-based measures (for both households and non-financial corporations). Capital-based instruments should also be considered to address vulnerabilities that could later result in system-wide increases in NPLs, and macroprudential authorities should develop early warning systems to monitor the risks of credit portfolio deterioration from a macroprudential perspective.

Finally, some of the triggers of system-wide NPL problems fall outside the scope of macroprudential policy, notably the legal and judicial framework as well as banks’ governance structures. Nevertheless, they determine the circumstances in which any macroprudential policy approach will have to be developed, and, as such, deserve consideration in designing macroprudential approaches to NPLs.

For media queries, please contact Silvia Margiocco, tel.: +49 69 1344 6619.

[1]The EU Council conclusions on an "Action plan to tackle non-performing loans in Europe", adopted by the ECOFIN Council on 11 July 2017, invited the ESRB to develop, by the end of 2018, “macro-prudential approaches to prevent the emergence of system-wide NPL problems, while taking due consideration of procyclical effects of measures addressing NPLs’ stocks and potential effects on financial stability”.