International comparison of the balance-sheet incidence of impaired loans is distorted by cross-country differences in practices. The Italian definition of the aggregate is broad, including assets that are still generating income. Moreover, the slowness of legal proceedings for credit recovery in Italy means bad debts remain on the balance sheet longer, thereby raising the level recorded in the accounts.
In any case, having a large share of impaired claims in balance sheets puts pressure on banks’ capital and liquidity. The first safeguard against the risk of deteriorating credit quality is effective borrower screening based on objective criteria, robust valuation models and optimal utilization of the information available to assess customers’ prospects.