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CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

HOW SERIOUS IS EUROPE’S NPL PROBLEM?

WHAT ARE THE MACRO-FINANCIAL IMPLICATIONS OF HIGH NPLS?

A. NPLs and bank lending

B. NPLs and corporate debt overhang

WHAT ARE THE OBSTACLES TO NPL RESOLUTION?

A. Prudential supervision

B. Legal obstacles

C. Distressed debt markets

D. Informational obstacles

E. Tax and other obstacles

A COMPREHENSIVE NPL RESOLUTION STRATEGY

A. Supervisory policies

B. Insolvency and debt enforcement reforms

C. External NPL management and distressed debt markets

D. Support measures

CONCLUSION

FIGURES

1. Europe: NPLs after the Global Financial Crisis

2a. Euro Area: Gross Nonperforming Exposure Ratios by Sector

2b. Non–Euro Area: Gross Nonperforming Loan Ratios by Sector

3. Euro Area: Implications of High NPLs for Bank Performance

4. Potential Capital Relief and New Lending from NPL Disposal

5. Europe: NPLs and Corporate Debt

6. IMF Survey-Based Scores on Obstacles to NPL Resolution

7. IMF Survey-Based Scores on Obstacles to NPL Resolution

8. Survey-Based Country Obstacles Score vs. NPL Outcomes

9. Capitalization and Provisioning

10. Supervisory Stringency and Coverage Ratios

11. Use of Restructuring Tools, 2012–14

12. Insolvency Regimes and Recovery Rates

13. NPL Disposals and the Role of AMCs

A1. Corporate Sector Debt Metrics and NPL Ratios

BOXES

1. Lessons from the Past International Experiences with NPL Resolutions

2. Compatibility of AMCs with EU State Aid Rules

REFERENCES

ANNEX

CONTENTS

I. THE EU DEFINITION OF NPLS

II. CREDIT GROWTH DETERMINANTS IN CESEE

III. MACRO-FINANCIAL EFFECTS OF HIGH NPLS

IV. THE IMPACT OF CORPORATE LEVERAGE ON INVESTMENT AND EMPLOYMENT

V. CAPITAL RELIEF AND NEW LENDING CAPACITY FROM NPL DISPOSAL

VI. IMF SURVEY ON OBSTACLES TO NPL RESOLUTION

VII. INTEREST ACCRUAL ON NPLS

VIII. THE REGULATORY TREATMENT OF NPLS IN THE UNITED STATES—EARLY LOSS RECOGNITION

IX. BUILDING BLOCKS FOR EFFECTIVE ARREARS MANAGEMENT

X. KEY RECENT REFORMS TO INSOLVENCY REGIMES IN SELECTED EUROPEAN COUNTRIES: CORPORATE INSOLVENCY LAW

XI. KEY RECENT REFORMS TO INSOLVENCY REGIMES IN SELECTED EUROPEAN COUNTRIES: PERSONAL INSOLVENCY LAW

XII. TREATMENT OF PUBLIC CREDITORS’ CLAIMS IN CORPORATE DEBT RESTRUCTURING AND INSOLVENCY

XIII. CORPORATE LAW OBSTACLES TO REORGANIZATION AND RESTRUCTURING OF FIRMS

XIV. COMPARATIVE ANALYSIS OF SELECTED EUROPEAN AND INTERNATIONAL AMC INITIATIVES

FIGURES

I.1. EBA’s New Definition of Performing and Non-performing Exposures

III1: Estimated Impact of NPL Shock on Bank Lending and GDP

IV.I Capital Relief using Country-Specific Haircuts

VI.1: IMF Survey-based Scores on Obstacles to NPL Resolution: by Country and Area

VI.2. IMF Survey-based Scores on Obstacles to NPL Resolution: by Area

TABLES

I.1. Classification Criteria for NPLs (percent answering “yes”)

II.1. Regression Results

III.1. Recent Studies on NPLs and Credit/GDP Growth

IV.1. Employment and Investment Elasticity to a 10 percent Sales Shock

IV. 2. Regression Results

V1.1 Obstacles to NPL/Distressed Debt Resolution Related to Information Availability

VI.2 Obstacles to NPL/Distressed Debt Resolution Related to Legal Framework

VI.3 Obstacles to NPL/Distressed Debt Resolution Related to Supervisory Framework

VI.4 Obstacles to NPL/Distressed Debt Resolution Related to Distressed Debt Market

REFERENCES