July 12, 2016
Taking Stock of European Banks: Improvements Amid Challenges
By Nathaniel Rome
An important metric of bank health is the non-performing loans (NPL) ratio. A loan becomes non-performing when a debtor defaults on a loan payment. The ratio is computed as the value of NPLs divided by the total value of loans that a bank has issued. In Italy, the NPL ratio is near 18 percent, far outpacing the EU average of 5.6 percent.
Looking broadly at the major European economies, NPL ratios have shown signs of improvement. Spain has seen dramatic progress since 2013, Germany has consistently reduced their NPL ratio, France has shown improvements, and Italy, for the first time in a decade, had a reduction in NPL ratio last year. This is a good sign for European banks. Banks, like those in Italy, will need to continue addressing the high stock of NPLs. The long term health of the European banking sector will improve if the NPL ratio continues to fall.