RISK MANAGEMENT THOUGHT LEADERSHIP

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Economic policy instruments for disposing of the accumulation of non performing loans

NPL management insight

riccardo.tedeschi@prometeia.com


Economic policy instruments for disposing of the accumulation of non performing loans

A high volume of non performing loans (NPLs) at the system level is a deadweight for growth. When the level of non performing loans on the credit disbursed – “NPL ratio” – exceeds a specific threshold (indicatively, 10%, if calculated on gross exposures), the profitability of banks is negatively impacted and their capital is eroded, thus reducing the capacity of banks to provide new credit to the economic system.

Disposing of the accumulated non-performing loans is therefore a necessary, albeit insufficient, condition for a country to go back to growing at a considerable pace.

The article briefly outlines the economic policy instruments and choices globally available in the “toolbox” of regulators and rulers for disposing of the undesired accumulation of NPLs that usually goes hand in hand with a financial crisis and Prometeia's set of tools to support banks in the management of NPLs.