The large number of non-performing loans (NPLs) held by eurozone banks poses a risk for all European lenders, the International Monetary Fund (IMF) announced in its latest Global Financial Stability Report.
According to the report, presented by the head of the IMF’s Monetary and Capital Markets Department, Jose Vinals, NPLs are calculated at 900 billion euros, out of which about 10 pct – about 100 billion euros – represent NPLs kept in the books of Greek banks.
“The hardest hit banking systems within the euro area in February have been those of Greece, Italy, and to a lesser extent, Portugal, along with some large German banks, reflecting some or all of the following factors: structural problems of excess bank capacity, high levels of NPLs, and poorly adapted business models,” the report notes.
Weak euro area bank profitability raises the difficulty of dealing with NPLs by reducing banks’ capacity to build capital buffers through retained earnings, IMF noted, adding that for many banking systems, elevated NPLs comprise a major structural weakness.
The Fund also recommends a comprehensive strategy to deal with NPLs which will combine a dynamic supervision, reform of the legal framework governing insolvency, the development of financial markets for negotiating NPLs (distressed debt markets), and the creation of asset management companies (AMC).
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