Indeed, following the capital and provision increases since the financial crisis, the NPL issue does not primarily concern solvency but rather banks’ profitability. The coverage of NPLs by provisions and collateral is, on average, 82% in the euro area and 80% in Italy. Net NPLs are therefore reassuring, from a solvency perspective.
Profitability however, is affected by the lower returns provided by the NPLs, given the weight of gross exposures in total assets. The share of total assets that generates lower revenues than full performing loans is a considerable European problem: gross NPLs represent 4% of total assets of euro area banks against only 0.8 % for U.S. banks.