The large volume of credit at risk in the balance sheets of European banks could threaten their existence. Banks can only concentrate on strategic and sustainable growth if they can be reduced.
More than ten years after the financial crisis, non-performing loans (NPLs) at risk of default add up to over a trillion dollars in the balance sheets of European banks.
The different development of NPL rates in the individual countries shows that a balanced and sustainable NPL level has not yet been reached in Europe. In order to ensure an NPL ratio of up to 3 percent for all banks, based on last year’s surveys from the EBA Transparency Exercise, NPLs in Europe with a volume of almost 600 billion dollars would have to be reduced.
Even in Germany, where non-performing loans only make up 2.6 percent of the total loan volume, 30 percent of these loans are not covered by risk provisions. This loan volume of USD 20 billion would have a direct impact on banks’ equity if write-downs were necessary.
High pressure on banks to reduce NPL
“For many banks, it’s about nothing less than their own future and long-term survival”
Philipp Wackerbeck, Strategy &
The pressure on banks to reduce non-strategic and non-strategic loans is increasing. The legacy issues limit new lending and competitiveness to China and the United States. This can have serious consequences for the economy, ongoing structural change and the necessary digitalization. This could also affect the relative competitiveness of the EU countries vis-à-vis China and the USA.
Space for profitable business
Accelerated deleveraging would provide many banks with scope for much-needed profitable business. In view of the persistently low interest margins and increasing regulatory requirements, it is essential for banks to accelerate the necessary wind-down measures and implement them quickly.
In addition to bad debts, this also applies to unprofitable loans, especially with a view to the expected increase in risk-weighted assets in the event of a compromise in the Basel IV negotiations. Against this background, the primary strategic goal of financial institutions should be to curb capital risks, which are still dormant in Germany and other economically strong European countries.
Four factors for reducing NPL
According to the study, four factors enable the successful start-up or improvement of ongoing mining activities both for existing bad banks and for possible national mining units.
1. New organization
First of all, the institutes should set up their organization in the sense of a new beginning and take into account that wind-down organizations clearly differ in their characteristics from conventional banks. This includes a tailor-made operating model with clear responsibilities and incentives for reduction measures, correct credit assessments and a holistic reduction plan.
2. Provision of resources
In addition, banks have to provide the necessary resources. The organization should be equipped with a carefully calculated, regularly evaluated and consistently secured level of financing and liquidity for the entire life cycle.
3. Balance between time and capital
With regard to the reduction activities, the interrelation between time and income in the context of the credit reduction and the hold-to-maturity activities must be guaranteed in the sense of a professional implementation.
4. Coherent mining plan
In addition, banks should pursue a coherent wind-down strategy that ensures a measurable incremental reduction in operations and organization as the portfolio progresses.