There remains further work to be done on reducing Europe’s non-performing loan levels, particularly if progress is to be made on completing banking union in Europe. Marie Kemplay reports.

Non-performing loan (NPL) levels in Europe may have fallen significantly since their peak in 2012/13, but in a number of countries, especially in southern Europe, they remain high. This could still pose a problem for achieving greater financial integration within the eurozone.

The EU’s fourth progress report on NPLs, published in mid-2019, showed that the gross NPL ratio for all EU banks had fallen to 3.3% (as of the third quarter of 2018), down from more than 7% at its peak.

According to full-year data for 2018 from the European Central Bank, 12 EU countries have gross NPL ratios of more than 5%, the level above which EU guidelines require banks to have a dedicated strategy for NPL reduction. The three countries with the highest NPL ratios – Greece, Cyprus and Portugal – have figures of 41.6%, 20.2% and 9.4% respectively.

For Cyprus, this marks a sharp fall from its 38.6% gross NPL ratio in 2014, and Portugal has also substantially reduced its ratio from 16.6% four years earlier. Greece, however, has seen its gross NPL ratio slightly increase from 39.7% in 2014 to 41.6% in 2018. Of the 10 individual banks in the EU with the highest NPL ratios, six are Greek (with Pancretan Cooperative Bank topping the table with a ratio of 59.07%), three are Cypriot and one is Portuguese. 

Good, but not good enough

Reducing NPL levels has been a key strand of post-crisis efforts to reduce financial risk within Europe. And though European NPL stocks have almost halved since 2014, levels are still regarded as too high.

At a wider level, German minister of finance Olaf Scholz recently wrote in the Financial Times about the importance of completing banking union for the ongoing stability of Europe’s financial system. His article set out several proposals for achieving further integration of the eurozone banking system including (most notably) the creation of a European reinsurance deposit scheme. It appeared to have been a significant signal of intent, as in recent years Germany has held out against reforms that would see it take on the financial risks of its European neighbours, particularly in the south. Germany’s own NPL ratio stands at 1.4%, down from 3.9% in 2014.

However, Mr Scholz’s backing for the introduction of such a scheme is contingent on a further reduction in financial risk within the eurozone banking sector, including a decrease in NPL levels. The relatively high levels of NPLs elsewhere in the EU could thus continue to be a hurdle to taking banking union forward.

NPL ratios 1219

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