Banks, new risks on non performing loans due to trade and international tensions

Brussels – Trade and geopolitical tensions are likely to have a strong impact on banks, leading to an increase in non performing loans (NPLs), i.e. loans which are difficult to repay. The alarm came from Claudia Buch, president of the Supervisory Board of the European Central Bank. During a hearing in the Economic Affairs Committee of the European Parliament, Buch revealed that her organisation has hypothesised an adverse scenario in which geopolitical tensions are expected to worsen, associated with higher tariffs, resulting in greater uncertainty, lower market confidence, and slower growth. 

In the worst-case scenario, Buch warned, the ratio of impaired loans “would increase to 5.8 per cent, reaching levels last seen in 2014.” Currently, she recalled, NPLs stand at around 2 per cent. Also in the worst-case scenario, she continued, “the aggregate losses would amount to €628 billion, or €80 billion, or 14 per cent, more than in the previous stress test” conducted at the ECB. 

The phenomenon of non performing loans is not new. On the contrary, for Europe, it is a long-standing story that sees Italy as a main player, having been for years one of the main holders of loans that creditors were unable to repay to the banks. An EU-wide strategy was evoked back in 2016 by Valdis Dombrovskis, the current Commissioner for the Economy and then Commissioner for Financial Market Stability. The process of recovery has been carried out and called into question by the Coronavirus pandemic. Now there is a risk of a new return to the origins.