## Unclogging Euro Area Bank Lending

_IMF Blog, April 30, 2015_

## Source details

**Canonical URL:** [Unclogging Euro Area Bank Lending](https://www.imf.org/en/blogs/articles/2015/04/30/unclogging-euro-area-bank-lending)

## Other formats

- [Markdown version](/en/blogs/articles/2015/04/30/unclogging-euro-area-bank-lending/index.md)
- [Structured JSON version](/en/blogs/articles/2015/04/30/unclogging-euro-area-bank-lending/index.json)
- [Bundle manifest](/en/blogs/articles/2015/04/30/unclogging-euro-area-bank-lending/bundle-manifest.json)

## Bibliographic details
- Authors: Will Kerry, Jean Portier
- Published: April 30, 2015

---

### Key findings on nonperforming loans
- A year ago the stock of bad loans in Europe was €800 billion.
- In the latest Global Financial Stability Report the stock of bad loans has grown to more than €900 billion.
- Two-thirds of this stock of nonperforming loans are concentrated in just six euro area economies.
- The European Central Bank’s Asset Quality Review confirmed that the majority of banks in many of these economies had high levels of nonperforming assets.

### Effects of bad loans on banks and credit supply
- Bad loans reduce bank profitability because banks:
  - have to set aside funds to cover losses;
  - generate less interest income;
  - incur associated operational costs (administrative expenses and legal fees).
- Consequences for lending capacity:
  - Less profitable banks have lower retained earnings and so generate less capital for new lending.
  - Loans (net of provisions) use scarce balance sheet resources and tend to have high risk weights for regulatory capital ratios, leaving less room to provide new loans.
  - Banks with high levels of nonperforming loans may be less willing to lend to borderline borrowers, creating credit supply squeezes and more competition for lending to good-quality companies.
- Demand-side effect: These loans reflect a corporate sector debt overhang that reduces demand for new credit because highly indebted borrowers are less likely to seek additional credit.

### Complementary policy context
- In January, the European Central Bank announced its expanded asset purchase program to address risks of persistently low inflation.
- Observed effects of the program include:
  - financing costs have fallen;
  - equity prices are higher;
  - the euro has depreciated;
  - these changes have helped to support inflation expectations.
- Complementary policies are required to maximize the effectiveness of monetary policy by unclogging bank lending channels.

### Policy recommendations to unclog bank lending
- Regulators should provide strong incentives for banks to maintain adequate provisioning to help reduce the gap between bank and market valuations for nonperforming loans.
  - Ensure provisions reflect forward-looking expected credit losses.
  - Ensure banks use prudent approaches to collateral valuation, recovery rates and resolution time.
- Banks should develop and use specialized capacity for handling nonperforming loans.
- Country officials should continue to review and reform legal frameworks for bankruptcy, where necessary.
- Regulators should provide greater clarity about bank regulatory and supervisory standards to reduce uncertainty as banks adapt business models to new regulatory and economic realities.
  - Clarity on medium-term regulatory requirements can make banks more willing to use capital or liquidity buffers (in excess of regulatory minima) to support lending.

### Simulated implications if no action is taken
- Global Financial Stability Report simulations suggest credit growth could be limited to a meager 1-3 percent on average per year if policymakers and bankers do not act to support bank lending.

*Source: Unclogging Euro Area Bank Lending — Will Kerry, Jean Portier; April 30, 2015*

---

## Content in this bundle

- **CHAPTER 1 EnhancIng polIcy tractIon and rEducIng rIsks**
  - [CHAPTER 1 EnhancIng polIcy tractIon and rEducIng rIsks (Markdown version)](/External/Pubs/FT/GFSR/2015/01/pdf/c1.pdf.md){rel="alternate" type="text/markdown"}
  - [CHAPTER 1 EnhancIng polIcy tractIon and rEducIng rIsks (PDF)](/External/Pubs/FT/GFSR/2015/01/pdf/c1.pdf){rel="external" type="application/pdf"}

---

## References

- [an €800 billion stock of bad loans](http://blogs.imf.org/2014/06/23/what-a-drag-the-burden-of-nonperforming-loans-on-credit-in-the-euro-area/)
- [https://www.imf.org/wp-content/uploads/2015/04/mcm-npl-1.jpg](https://www.imf.org/wp-content/uploads/2015/04/mcm-npl-1.jpg)
- [https://www.imf.org/wp-content/uploads/2015/04/mcm-npl-2.jpg](https://www.imf.org/wp-content/uploads/2015/04/mcm-npl-2.jpg)
- [corporate sector debt overhang](http://blogs.imf.org/2015/03/31/making-small-beautiful-again-the-challenge-of-sme-problem-loans-in-europe/)
- [adapting business models](http://blogs.imf.org/2014/10/20/banks-should-help-not-hinder-the-economy/)
- [Global Financial Stability Report](http://www.imf.org/external/pubs/ft/survey/so/2015/POL041515A.htm)

_Source: https://www.imf.org/en/blogs/articles/2015/04/30/unclogging-euro-area-bank-lending_