Report on Asset Quality in the EU Banking Sector

The European Banking Authority published a report on the recent dynamics, cross-country dispersion and drivers of non-performing exposures in the EU banking sector. The report covers a review of 166 EU banks from September 2014 to March 2016. The EBA notes that there is a high disparity between jurisdictions, suggesting that the average non-performing loan (NPL) ratio is up to three times higher in the EU than in other jurisdictions. The report provides an overview of asset quality across jurisdictions and analyzes the riskiness of counterparties in different countries and the structural characteristics of local markets that can affect credit quality, provisioning policies and recovery of distressed assets. 

The EBA highlights three areas where it considers improvements would reduce the impediments to resolution of NPLs. Firstly, the EBA recommends that more support for supervisory work is needed, including a harmonized application of the definition of default (for which the EBA already has work in progress) and supervisory guidance on dealing with NPLs, collateral valuation and effective arrears management and NPL resolution governance inside banks.  Secondly, the EBA noted that there are structural issues impeding the resolutions of NPLs. By improving the judicial process and reducing court backlogs combined with the use out of out-of-court restructuring, the marketability of NPLs could be improved. The third area of improvement is the liquidity, transparency and efficiency of secondary markets in loans that are used to facilitate the disposal of NPLs.  The EBA also notes that the improvement and revival of the EU debt securitization market could increase the options for banks to deal with their NPLs. 

View the report.