Carlos da Silva Costa: Addressing NPLs at a European level
leaving the crossroads
Address by Mr Carlos da Silva Costa, Governor of the Bank of Portugal, in the magazine of the
Eurofi conference in Malta, 5-7 April 2017.
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Addressing the high level of NPLs was one of the SSM's supervisory priorities for 2016. It
remains one of the major supervisory challenges in 2017.
Indeed, the overall stock of NPLs in the euro area is relatively high compared with other
geographies, albeit with significant heterogeneity. Some Member States experienced a rapid
surge in the NPL ratio subsequent to a burst of a real estate bubble. In other Member States, the
increase occurred later and was widespread across sectors. This is the case of Portugal, for
instance, where NPLs grew essentially in the context of the 2011-13 recession and are a
manifestation of the ongoing economic adjustment process, characterized by a reallocation of
resources towards the tradable sector and away from the construction and real estate sectors.
The current setting mirrors these differences in pace and drivers, as well as the specificities of
national economies: some jurisdictions report double-digit NPL ratios, while others report much
lower levels.
In an integrated market, however, different ratios do not - cannot - mean different degrees of
concern. Repercussions of high NPL levels cross borders: through banks' balances sheet
cross-exposures, through economic spillovers in the face of subdued credit supply and hindered
monetary policy transmission and inevitably through market perception. The systemic nature of
such risks is heightened by widespread low bank profitability, increasing capital requirements
and a still incipient NPL secondary market.
NPLs are, indisputably, a European problem. And a European problem calls for a European
approach. But to what extent?
A European approach resides first and foremost on concerted action from all Member States.
Enhanced efforts at national level, especially in what regards bank supervision and marked
improvements in the legal/judicial/tax framework - notably to reduce the significant bid/ask
spread in NPLs secondary market - are a necessary condition to address the high NPL stock
and to build the foundations for a better management of flows. But they are certainly not
sufficient. The abovementioned risks of contagion also require targeted and potent initiatives to
reduce the NPL stock - and this is where a unified European strategy could prove more valuable.
A European problem calls for a European approach. But to what extent?
The first step for a unified European strategy is acknowledging its need. In the face of
nonnegligible risks to financial stability and financial integration, as well as the referred heterogeneity
across banks and economies, a debate should be launched on the possible mismatch between
the repercussions of high NPL levels and the current strictness of the EU legal and regulatory
framework. In particular, the BRRD was designed for a steady-state, which is still far from the
current situation in financial markets, and State aid rules, while placing financial stability at the
core, seem to provide little flexibility to address the systemic nature of the problem. To reduce
NPLs in a significant and swift way, these constraints must be addressed - but only a European
approach can do so while ensuring the necessary level playing field, an essential precondition for
the coordinated action that should follow.
This discussion - ideally complemented by enhanced flexibility - would provide decisive clarity
on the rules of the game and likely pave the way for bolder solutions at national level, especially in
countries where the NPL challenge is more pressing. It could also be the starting point for
considering and conceiving a more ambitious strategy to effectively reduce NPL stocks across
Europe. A strategy with the necessary firepower to enhance national efforts and complement
ongoing initiatives in the SSM and other European fora. Some promising European approaches
have been recently put forward and deserve to be further explored.