Finance Minister Edward Scicluna said that the EU Economic and Financial affairs Ministers, together with EU institution financial leaders have prioritised the problem of non-performing loans across the EU.
A non-performing loan (NPL) is when an individual is defaulting on their loans with the bank, in effect not making the necessary monthly payments. Professor Scicluna explained that while the problem is more persistent in some countries than in others, a “negative spill-over” effect has necessitated a more coordinated EU-wide approach to the issue.
Professor Scicluna together with Commissioner for Economic and Monetary Affairs Valdis Dombrovskis and European Central Bank vice-president Vítor Constâncio revealed that a set of guidelines have been issued to banks across the EU which outline a set of best practices on how to deal with NPLs.
It was said that the value of NPLs amount to roughly €1 trillion, and is problematic because it locks up capital in banks which could otherwise be used to finance projects across the EU.
“We had set up a sub-group tasked with examining the issue and putting forward policy options. Today, we took stock of what the group has done so far. One of the most striking conclusions was that banks are unable to solve the problems on their own, and that a more comprehensive approach is necessary. A lot of work is being done with respect to individual EU member states but space has been set for further action on structural issued, developing a secondary market for NPLs and the restructuring of the banking system.
“We have not found a silver bullet to address the issue, it is a question of applying a multi-faceted approach,” said Minister Scicluna while addressing members of the press.
He added that today’s discussions have paved the way for a report on the issue to be finalised for the next informal meeting of economic and financial affairs ministers next June (ECOFIN).
Minister Scicluna said that this report should serve as the basis for an over-all strategy in dealing with NPLS.
As of March 2016, EU figures showed that Malta was the 12th highest country in the EU plagued with non-performing loans, with the highest being Cyprus. The figures have improved since 2014, possibly due to the improved employment figures and economic growth Malta has been experiencing.
Commissioner Dombrovskis said that “the euro area is more resilient today than years ago, but there is broad consensus saying we need to act for the euro area’s economy. We discussed the guiding principles on the monetary union – finding the right balance between risk reduction and risk sharing, convergence in the euro area, and the euro area being open and transparent to non-euro zone countries.
“Tackling the issue of NPLs is primarily responsibility of the member state because of banking structural differences between one country and the next. There are a number of areas where we can join national efforts for a pragmatic strategy. There was a broad support on developing a blue print for a supranational strategy, using existing experience to develop a solution that member states can implement. We also foster further initiative to facilitate the stimulation of a secondary market for non-performing loans.”
The creation of a secondary market refers to the repackaging of ‘bad loans’, bundling them together and selling them off to investors who would turn a profit should the loans eventually be paid off. Through selling repackaged bad loans to investors, banks would succeed in shifting inherent risks of carrying high volumes of NPLs and would free up capital, leaving investors with the possibility of turning a profit.
Vice President Constâncio said that “the NPL issue is affecting several countries in the EU and is hampering the profitability of the baking sector. It must be addressed in a more forceful way. We in the ECB have responsibility to supervise and we have started to act in different ways. Recently we issued a guidance to the banks on the best practices to deal with the NPL issue in their balance sheet.
“There are limitations dealing with these matters because they cannot impose that banks have to sell parts of their NPLs. In 2005 provisions for those possible losses of bad loans were set up by accounting groups
“Writing off bad loans is effected by the level of provisions obtained according to accounting rules. The meeting recognised many other actions had to be utilised. Looking at the number of NPLs pre 2007, things were at stable and normal levels, so this problem is still a legacy of the [2008 Financial] crisis.