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.
Wolfgang Bergthaler is senior counsel at the International Monetary Fund’s Legal Department, where he works on a broad range of legal issues including IMF financing operations, surveillance, exchange system, and financial sector issues, as well as sovereign debt, corporate and household insolvency, and judicial reform issues. Before joining the IMF in 2006, he practiced as an attorney in international law firms in Europe. Wolfgang is a graduate of Karl-Franzens Universitaet Graz (Austria) and Georgetown University Law Center (US).