Reviving Credit in the Euro Area

IMF Blog, November 23, 2015

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Title: Reviving Credit in the Euro Area
Authors: Jean Portier, Luca Sanfilippo
Date: November 23, 2015
Context: Summary findings from the Global Financial Stability Report on nonperforming loans (NPLs) in the euro area.

A stock in excess of €900 billion of nonperforming loans continue to clutter the European banking system, impeding economic growth.
Current inefficiencies—long foreclosure times and insolvency procedures—contribute to a gap between the value of loans on bank balance sheets and the price investors are willing to pay.
Time to foreclose is used as a proxy for effective insolvency regimes in the analysis.
Slow foreclosure times impede rapid NPL resolution, leading to higher NPL ratios.
Example: In Italy, the current time to foreclose of four years is twice the current euro area average.
Example: Italy’s average NPL ratio of about 11% is 1.6 times the euro area average.

Creating incentives for the effective restructuring or resolution of nonperforming loans by achieving a foreclosure time of one year maximum in each country can create a new lending potential of about €600 billion for the euro area as a whole.
The potential positive impact in the most vulnerable countries of the euro area, where collateral foreclosure time is higher on average, is upwards of €373 billion in extra lending.

Countries should consider improving insolvency regimes as a tool to reduce the number of non-performing loans and help banks lend again.
Upgrading legal systems and ensuring a reliable legal environment and an efficient judicial system can maximize the value of NPLs, reduce the value gap, and give banks greater incentive to remove NPLs from their balance sheets.

Source: Reviving Credit in the Euro Area, Jean Portier and Luca Sanfilippo, November 23, 2015.