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Asset quality: An unfinished business in Europe

One of the consequences of the latest financial crisis for banks has been the so-called non-performing loans or NPLs. Loans regarding which the borrower has either already failed to meet his payment obligations or is showing signs of having difficulties meeting them. Some financial systems, such as Spain’s, have already done their homework clearing their balance sheets. However, for other systems credit quality is still a matter that needs to be addressed. A recent case are Italian banks, which still bear a burden of over €300 billion in this type of assets.

As noted by BBVA Executive Board Director José Manuel González-Páramo, in a recent article published by Eurofi, this problem is very heterogeneous among countries due to several reasons. First, the build-up of the problematic exposures is different, as in some cases NPLs were concentrated in one portfolio that experienced a credit boom. This is the case of the real-estate industry in Spain, which had a direct impact on banks with high-exposure to development and mortgage lending. On the other hand, in others credit quality worsened as a result of a protracted period of low economic growth that translated into generalized problems in most portfolios and banks.

In second place, the Second, the level reached also differs among countries. Logically, NPL rates are higher in economies more affected by the crisis.

And finally, each country applied their own recipe. Asset cleansing has been more successful in systems where banks were very active in restructuring, refinancing and selling damaged exposures. All this led to the creation of asset management companies and the adaptation of insolvency regulation so as to help financial institutions digest their troubled assets.

“The real dimension of the problem is difficult to compare among countries, as the definitions of NPLs used internationally differ,” writes José Manuel González-Páramo, who last week took part in the Eurofi Financial Forum 2016 held in Bratislava (Slovakia). European authorities (EBA, SSM) are working on a homogeneous definition to facilitate this task.. “Being able to properly compare asset quality among financial systems is crucial in the framework of the Banking Union,” he emphasizes.

In his opinion, solving this pending issue is a matter that should be addressed sooner than later. “Only after banks get rid of this burden will they be able to support the economic recovery. Furthermore “the future of the Banking Union depends on being able to mutualize risks and costs, and to get to these compromise legacy assets should have been left behind.”

As a final recommendation, the highest authority in Regulation matters within BBVA reminds that “recent experience shows that it is of utmost importance to acknowledge the asset quality problems and to understand their origin in an early stage of the process.” To this regard, he argues that both private and public initiatives should be ambitious and coordinated, if this critical endeavor is to succeed.

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