Non-performing loans are one of the biggest drags to bank profitability in Europe. A high-level of bad loans increases the liabilities pile on a bank’s balance sheet. As a result, the lender will have to generate higher profits to offset those liabilities. In recent times, European bank’s profitability have also come under pressure due to a lower interest rate environment, uncertainties surrounding U.K’s exit from the European Union.
A report from the European Parliament from last March showed the level of bad loans has somewhat decreased over recent years, from 6.4 percent in December of 2014 to 4.2 percent at the end of September 2017.
“However, the current NPL level in the EU is still higher than in other major developed countries,” the report from European institutions said.
“However, the current NPL level in the EU is still higher than in other major developed countries,” the report from European institutions said.
Apart from reducing bad loans, there has also been a big push for stronger regulation. Banks have been forced to increase their capital ratios, the European Banking Authority was established to oversee lenders and it conducts regular stress tests to ensure the banks are strong enough to sustain a crisis.
George Magnus, former chief economist at UBS, told “CNBC’s Street Signs” Wednesday that regulation is more “intrusive” now, which has made some parts of the financial system safer compared to 10 years ago.
“Having said, whilst personally I think regulatory authorities around the world may be in a much stronger position to spot and save individual institutions… the clue to solve a systemic financial crisis is in the name systemic. Have we resolved the problems in the financial system and in the economic system that actually gave rise to this and previous crises? I don’t think we have really done that,” he said.
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