Perhaps, however, the most important challenge facing European banks is that of nonperforming loans. There are two broad areas where research is needed. First, how do we deal with the legacy NPLs, those that built up during the crisis? Questions which arise include: what is the best way to reduce NPLs quickly? To what extent are there issues of strategic default?
What institutional reforms are required in the wider economy to facilitate the smooth work-out of NPEs? What are the implications for financial conditions of NPEs and the smooth transmission of monetary policy? The second broad area is how we treat new NPLs going forward.