Persistently high non-performing exposures (NPLs) in several European countries pose significant challenges to financial stability and are likely weighing on credit growth and economic activity. This paper, which summarizes a detailed IMF analysis (IMF SDN/15/19), examines the structural obstacles that discourage European banks from addressing their problem loans. It argues that a comprehensive approach comprising three pillars is needed to accelerate balance sheet clean-up: (1) intensified banking oversight, to incentivize write-off or restructuring of impaired loans, including fostering more conservative provisioning and time-bound restructuring targets on banks’ NPL portfolios; (2) enhanced insolvency and debt enforcement regimes, and more developed out-of-court restructuring frameworks; and (3) the development of distressed debt markets by improving market infrastructure and, in some cases, using asset management companies (AMCs) to jump-start the market. A variety of facilitating measures could support these three main pillars, including better public registers, the removal of tax disincentives, and debt counseling services.
Dermot Monaghan is a senior financial sector expert in the Monetary and Capital Markets Department of the International Monetary Fund. He has worked on a broad range of financial crisis related issues, mainly in Europe and Asia. Previously he worked as Chief Risk Officer, in the Department of Finance in Ireland, and before that he worked at the Central Bank of Ireland, a large German bank, and an Italian hedge fund. He has a PhD from Queen’s University Belfast (UK).