Does Europe Have What it Takes to Finish the Banking Union? Non-Performing Loans (NPLs) and Their Hard Choices, Non-Choices and Evolving Choices

Abstract

Post-crisis European reforms have focused on 'micro' measures, like shoring up financial institutions, ensuring their solvency and sound supervision, and the resolution to deal with them in a crisis. However, bold 'macro' measures to deal with problems that cut across the whole financial sector remain elusive. Non-Performing Loans (NPLs) are a clear example, and until a solution is found for them the Banking Union will only be half-finished. This article focuses on the experience by different countries, such as Ireland, Germany or Spain, to propose a strategic decision-making matrix to devise a solution to deal with NPLs at an EU level, and also discusses some country cases in detail to illustrate both the risks associated to inaction (Italy), and to the interactions between NPL policy, and investor protection policy (Spain).

Keywords: non-performing loans, assets, bad bank, asset management company (AMC), NAMA, SAREB, FMSA, financial crisis, banks, Banking Union, governance

JEL Classification: G18, G21, G23, G28, G34, G38, K22, K23