Convergence in non-performing loans across EU banks: The role of COVID-19

Abstract

Given the impact of the COVID-19 pandemic on the European real economy, European banks are likely expected to be confronted by a wave of non-performing loans. Focusing on a sample of large banks in the EU area over the pre and during the COVID-19 pandemic period, the analysis shows an extended degree of divergence during the pandemic crisis, with GDP, bank profitability and risk being held the responsible factors. The findings imply that potential plans to deal with NPLs should explicitly consider strategies running from bank restructuring and resolutions to recapitalisation or any other rescue measures.

Keywords:

• NPLs
• convergence
• COVID-19 regimes
• European banks

JEL Classifications:

• G20
• G21
• C33

PUBLIC INTEREST STATEMENT

Since the time of the global financial crisis, non-performing loans (NPLs) have been treated as a serious problem for banking systems; the presence of the COVID-19 pandemic is expected to deteriorate the impact of NPLs. This research study explored convergence across EU banks to determine whether NPLs follow homogeneity across EU. The results highlight a divergent pattern in the pandemic period. Responsible factors are economic growth, bank profitability and bank risks, since they behave differently across countries in the pandemic era. The findings recommend that policymakers should ensure that banks assess current loan values realistically, which can be achieved by effective stress tests, adequate accounting rules, and specific inspections that impede banks masking their risk. Moreover, the development of secondary markets for NPLs is also highly recommended, because in future pandemic periods can deal better with information asymmetries and banks’ lacking incentives to sell loans at market prices. This will reduce the need for government bailouts, with future positive spillovers to the real economy.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Author statement

The author’s research activities explore energy issues, the interaction between financial markets and the macroeconomy, the role of monetary policy in a digitalised environment, and how the recent COVID-19 pandemic has affected certain sectors in the economy, including the banking sector, in terms of its profitability, risk engagement and efficiency. This current empirical work is part of the latter portfolio agenda.

Additional information

Funding

The author received no direct funding for this research.