For all the progress we have made, there’s still one topic that continues to worry me. Roughly eight years on from the onset of the financial crisis, a number of European banks are still saddled by disturbing amounts of non-performing loans (NPLs). Therefore, scaling back these legacy exposures is one of the foremost aims of banking supervisors in the euro area, and rightly so.
There are two main reasons why we’re interested in NPLs. One, they make banking systems more vulnerable because they drive up both capital requirements and funding costs. Two, they make it harder for the banks in question to supply credit; this, in turn, puts the brakes on growth in the euro area.