European authorities typically link the current low profitability of banks—from a historical perspective—to high non-performing loans. They consider that non-performing assets in institutions’ portfolios limit the capacity to grant credit and assume new risks. In their view, completing the adjustment of banks’ balance sheets is also essential to make decisive progress in the banking union.
These messages are entirely reasonable, but it is necessary to provide figures to assess the severity of the problem. Non-performing assets for European banks as a whole are estimated at over one trillion euros, a very significant figure. However, this represents barely 4.5 percent of total assets. It is true that there are significant differences between countries, ranging from 47 percent for Greek banks to barely 2 percent for German institutions. Undoubtedly a problem for the banking sector, although not its main concern.
Along these lines, the IMF made a similar assessment in its latest financial stability report. The institution attributes the medium-term profitability problems of European banks to the sector’s structural challenges: too many banks, too large, and with too many branches. This document also mentioned publicly capitalized institutions and market and administrative deficiencies, which are significant obstacles to reducing portfolio non-performing loans significantly and quickly.
Accumulated non-performing loans are one of the wounds of the crisis. The scars are the limits on risk-taking that banks face in terms of capital regulation and resolution. All of this considering the high competition within and toward the sector, in a scenario of low economic growth and near-zero interest rates. Non-performing loans in portfolios do not appear to be an obstacle for European banks to provide financing. Credit balances are growing at almost twice the nominal growth rate of the economy. Furthermore, if solvent demand requires it, institutions are prepared for greater growth, as they have deposited with the ECB a volume of funds equivalent to 60 percent of the non-performing loan figure. A volume of funds for which they pay 0.4 percent to the monetary authority.
