However, banking credit indicators do not tell the whole story.<sup>61</sup> While net credit growth may be negative for large segments of the population, there is diversity among banks, firms and individuals (see below). Some firms borrow directly from international capital markets, though capital market financing, particularly debt financing is generally limited to a small subset of firms in each country.<sup>62</sup> Distressed domestic markets have ended up constraining those firms that are less likely to get credit on international markets (EC, 2015).<sup>63</sup> _<u>Financial sectors still need help.</u>_ In Ireland, several years of recession took their toll on banks with nonperforming loans still high at around 25% in 2014. Ireland’s deterioration was dramatic as in 2007 it had an NPL ratio of 0.6.<sup>64</sup> Banks had yet to restructure their household and SME debt, which at end‐2013 accounted for 60% of the NPL stock. Unsurprisingly, Greece’s banks were in the worst position when considering the ratio of nonperforming loans‐ estimated at over 33% in 2014, rising from 4.6% in 2007. Gross NPLs in GIPS are shown in Figure 13b. High as they are, NPLs on the books are not the whole story. Table 8 shows Gross Nonperforming Exposure, a measure that includes both on and off balance sheet liabilities (not considering the impact of collateral, which would reduce net exposure).<sup>65</sup> Among the countries listed, Ireland and Greece are in the most vulnerable position after Cyprus. Of particular note is the fact that Greece is the only one among the four where retail (including household debt) NPLs are higher than corporate ones.<sup>66</sup> Portugal (under 11% NPLs) and Spain (under 10%) have also seen very large increases since the crisis. Spain and Portugal are also above the median in terms of the NPL ratio.

Traditionally, financial regulation and supervision was, for the most part, the purview of the national central banks; the ECB was responsible for payments system functioning and, together with the national central banks, financial stability of the overall euro area. The ECB’s modus operandi changed substantially as a result of the twin crises and it now has direct supervisory authority over systemically important banks in the Eurozone (the Single Supervisory Mechanism oversees 130 banks).<sup>67</sup> In January 2016, it also adopted the Single Resolution Mechanism, which is centered on a Single Resolution Board, endowed with a Single Resolution Fund. The financing for the Fund is still to be determined. National authorities, not the SRB, will oversee implementation (Veron, 2016) of bank resolution. The third pillar of the banking union, the deposit insurance scheme, is yet to be negotiated and established. Also, an important factor is that about 3,500 banks remain supervised by national authorities. A recent study (Mody and Wolff, 2015) finds that small and medium sized banks holding about half of the euro area’s assets could be a significant source of systemic instability in case of a negative shock‐ GIP continue to be vulnerable. The level and distribution of capital across the whole banking sector has real effects on overall lending and the macroeconomy, particularly when there are externalities and informational asymmetries that prevent credit reallocation leading to self‐fulfilling equilibria (Bebchuk and Goldstein (2009), Dagher et al, 2016). Banks’ lending practices are influenced by their expectations of overall banking behavior. For example, if large banks expect overall lending to be lower because of deteriorated financial conditions in

> 61 In Spain, for example, overall credit was still declining (IMF, 2015c) in 2014, but the pace has slowed and new credit is being extended outside real estate and construction.

> 62 Didier et al (2015), show that in the median country, only about 20 listed firms per year issue securities in either their domestic capital market or in an international financial center. Moreover, the median equity issuing firm is twice as large as the median non‐equity issuing firm and the median bond issuing firm is more than 36 times as large as the median non issuing firm. Of the few debt and equity issuers, the top 5 firms receive 66% of the funds raised through bonds and over 77% of the funds raised through equity.

> 63 For example, SMEs in Spain (for loans below 1 million euros) since end 2013.

> 64 IMF (2015g).

> 65 The NPL data are reported on a consolidated basis for banking groups and include the value of collateral; the NPE data use locational data on impaired loan exposures and are weighted by total assets.

> 66 This is also true for some other EU countries, but the ratio in Greece is a multiple of these other countries’ ratios.

> 67 9 more banks were assessed at end‐2015.

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