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.
Anna Ilyina is a Division Chief (Poland-Baltics) in the European Department at the International Monetary Fund (IMF). Previously, she headed the Emerging Economies Division in the IMF’s European Department and was responsible for the production of the biannual Regional Economic Issues Report on Central, Eastern and Southeastern Europe. In recent years, she also worked on the IMF’s Global Financial Stability Report, on the IMF’s Early Warning Exercise and on a range of countries. Her research interests include growth and financial development, macro-financial linkages, international economics, financial stability and cross-border spillovers. She has publications in the Journal of Monetary Economics and in the Journal of Money, Credit and Banking, among others. She holds a Ph.D. in Economics from the University of Pennsylvania.