Many banks across Europe suffer from high levels of non-performing loans (NPLs), in particular in Cyprus, Greece, Portugal, Ireland, Italy and some Central and Eastern European countries. NPLs across the euro area peaked at eight percent of total loans in 2013 and have fallen only gradually in some countries since then.

NPLs consume capital, management time and attention. They decrease profitability and leave some banks in a weak position from which to provide finance to support growth and jobs – which in turn may limit the effectiveness of monetary policy. They may even undermine the viability and sustainability of a bank.

So why have NPLs remained stubbornly high in some banks and some countries? In this paper we highlight four key impediments for this: banks’ lack of preparedness, structural impediments, investor pricing, and limitations on government assistance.

It is possible to address these impediments. The European Central Bank guidance on NPLs should increase banks’ preparedness; more active markets for NPLs have developed in some countries, assisted in part by national asset management companies; and macro-economic conditions are showing signs of improvement in Europe.

But in some countries it has proved difficult to tackle many of the deep-rooted structural impediments, leaving too wide a gap between bank and investor valuations of NPLs and of underlying collateral. And there remains a degree of both uncertainty and perhaps over-restrictiveness in the application of EU State Aid and bank resolution rules to any solution involving public funds or government guarantees.

Responses from 18 banks in 10 SSM countries imply that the average bank requires approximately 1-2 years to implement the ECB guidance, will spend over €5 million in the process, and views the highest impact areas as: data and documentation; internal reporting; IT; and collateral management.