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Markus Demary Press Release 7. May 2018

Non-performing loans: Herculean task for the Eurozone

The big banks in the Eurozone are still sitting on non-performing loans worth over half a trillion Euros. Especially in Cyprus, Greece and Italy bank failures are likely, as shown in a study of the German Economic Institute (IW). If the banks were to be made fit for the introduction of the planned European Deposit Insurance Scheme, then a great deal of money would have to be spent on their restructuring.

In their analysis, the IW financial experts consider the 76 largest, systemically important banks in the Eurozone. These banks hold around three quarters of all non-performing loans, which corresponds to a volume of over 566 billion Euros. Particularly problematic: more than a quarter of the lending volume is non-performing in more than 10 percent of the major banks. For these banks, the risk of failure remains high - with potentially serious consequences for the economy.

Although the former crisis countries made great progress last year, major Italian banks still hold non-performing loans worth 189 billion Euros. In Spain it is around 100 billion. In the event of a renewed crisis, bad loans could pose major problems for Greece, Italy and Cyprus: for the major banks considered in Greece and Cyprus, more than a quarter of their loan volume is non-performing, and in Italy, the same applies to three major banks.

"Even the bankruptcy of two or three major banks could destabilize the Eurozone financial sector," warns Demary. If one were to try to write-off the non-performing loans until the planned introduction of the European Deposit Insurance Scheme in 2024, creditors and governments would have to invest billions of dollars each year, according to the IW financial experts: In order to limit the redistribution between states in the case of European Deposit Insurance Scheme, the share of bad loans at all banks would have to be reduced to around 3 percent of their lending volume. In such a scenario, however, around € 345 billion would have to go into the recapitalization of the Eurozone banks as a whole, according to the IW. However, these costly restructurings would not be possible for countries such as Cyprus or Greece.

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Tackling Non-performing loans in the Euro area. What are the costs of getting banks fit for a European Deposit Insurance Scheme?

Markus Demary

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