Market Insight by Nicolas Roth - Dawn of a new NPL cycle in Europe

Non-performing loans (NPLs) are an integral part of the lending cycle. During an expansion phase, banks provide more loans, and relax lending conditions; when the cycle turns, a portion of those loans becomes non-performing or defaults. NPLs are invariably bad news for banks as they consume capital, time and resources, and so are considered as a bad omen for the real economy. Banks saddled with large stocks of bad debt subsequently reduce their lending activity, and NPLs become a direct threat to economic growth and financial stability. The fallout from the Covid-19 crisis will likely create a surge in insolvencies and bankruptcies resulting in mounting bad loans. The European Commission (EC) and the European Banking Authority (EBA) understand how critical it is to have an adequate framework and a coordinated response to tackle this upcoming problem. What are the proposed measures to prevent banks from being clogged with bad debt?

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