Panayiotis Rougalas
The European Central Bank (ECB) is closely monitoring non-performing loans (NPLs) and related legislation, including the divestment framework. Addressing NPLs has remained a top priority since the ECB began supervising banks. Supervisors express significant concern about legislative proposals that may undermine NPL resolution, notably in Cyprus.
In a recent ECB blog post by Elizabeth McCaul, an ECB Supervisory Council member, and Korbinian Ibel, Director General of Universal & Diversified Institutions, it emphasized that collaborative efforts between banks, policymakers, and supervisors have effectively reduced NPLs. They highlight the importance of preserving these achievements during times of economic uncertainty to support households and small businesses.
McCaul and Ibel stress that despite inevitable borrowers being unable to repay loans, unresolved NPLs weigh on banks' profitability and resources, limiting their ability to provide credit, especially during economic uncertainties.
In 2017, the ECB encouraged banks with high NPL levels to develop effective strategies for reducing them. Clear provisioning rules were adopted, recognizing the cost and time involved in NPL resolution. Flexibility in approach and tools is essential, based on NPL characteristics and the operating environment.
The ECB's supervisory approach encourages significant NPL reduction, but broader policy initiatives are needed to ensure successful resolution. These include improvements in insolvency and foreclosure frameworks, efficient judicial processes, the development of the NPL servicing industry, and robust NPL markets.
Historically, weak legal frameworks have negatively affected consumers, businesses, and vulnerable members of society, limiting access to credit. Fiscal measures to support borrowers facing debt challenges, especially during crises like the COVID-19 pandemic, are crucial for balanced and sustainable solutions.
The ECB's supervisory approach has effectively reduced NPLs over the past decade, providing banks with strong balance sheets to weather economic uncertainties. However, the task of reducing NPLs is not complete, and any intervention in the successful supervisory strategy and legal framework would be unwise.
Banking supervisors closely monitor legislative developments that could impede progress. Effective legal frameworks and swift judicial procedures are vital for NPL reduction, and any measures that may cause delays in legal processes are strongly opposed. Strengthening the frameworks to prevent NPL accumulation remains a priority.
