Approaching Non-Performing Loans from a Macroprudential Angle

Abstract

This report looks at non-performing loans (NPLs) from a macroprudential angle. The accumulation of NPLs on banks’ balance sheets comes to the attention of macroprudential authorities when they weaken a significant part of the financial system, threatening its stability or impairing one or more of its core functions, such as the provision of credit to the real economy. Various imperfections, including unaddressed externalities, economies of scale and coordination failures, institutional distortions (stemming from the accounting, regulatory and tax treatment of NPLs or the judicial and market structures needed for their efficient resolution) and moral hazard vis-à-vis the providers of the banks’ safety net, may call for policy action on the management of NPLs. While the tools needed to address these imperfections and their consequences may not be mainly macroprudential, the trade-offs that must be struck when using such tools have an important macroprudential component, thus requiring an active involvement of macroprudential authorities – not least as assessors of the overall consistency and cumulative systemic impact of the undertaken policies, in normal times as well as during crises and in their aftermath.