Should NPL targets be published?

21/07/2017

 

CEO's Notes


 

The reduction of non-performing loans (or NPL) is one of the supervisory priorities set by the ECB for 2017. Hardly surprising, considering that these amounted to about €1 trillion for the significant banks in the Euro area.

High levels of NPLs inhibit banks from lending, take up management time and can have a 'drag' effect on balance sheets and profitability. The ECB has published guidance aimed at helping banks tackle the problem. It requires those with high NPLs to define and install specific reduction targets. It also recognises that this may take time and how fast a bank can resolve its NPLs depends on the legal and judicial process.

The suggestion that specific reduction targets should be published has led to various reactions. Some note that the ECB does not set quantitative targets but asks for time-bound strategies that consider work-out, servicing and portfolio sales. Others, like Maurizio Sella, President of ABI and Chairman of Banca Sella, have criticised the Italian experience. He argues that making public a bank’s NPL target puts it under pressure to foreclose, causing asset prices to crash as vultures play the waiting game. And that's not the end of it, since the judicial process in Italy is one of the longest-drawn in Europe.

The Maltese authorities publish NPL data for financial stability purposes. It provides useful statistical and comparative information on bank asset quality. They do not announce targets but communicate specific reduction goals to individual banks. This is the sensible approach which should continue to steer the handling of the NPL challenge in Malta.

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