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Online Seminar ‘Risk Reduction in the Banking Union: NPLs and Sovereign Debt Concentration’

Daniel Gros and Willem Pieter De Groen from the Brussels-based think tank Centre for European Policy Studies (CEPS) debated the topic of ‘Risk Reduction in the Banking Union: NPLs and Sovereign Debt Concentration’ in our latest online seminar, on the 17th of April 2018.

Daniel Gros is the Director of the CEPS, which he joined in the late 1980s after having worked at the IMF and the European Commission. Willem Pieter De Groen is a Research Fellow at CEPS, heading the Financial Markets and Institutions Unit, and is an associate researcher at the International Research Centre on Cooperative Finance (IRCCF) of HEC Montréal.

In their address, the speakers addressed the issues of Non-Performing Loans (NPLs) and the concentration of sovereign exposure which, despite being two elements quite different in nature, are essentials to be tackled in order to reduce overall risk in the Banking Union.

Discussing non-performing loans, the speakers outlined how they are now well known by the actors in the sector and should no longer be considered a ‘risk’, despite there is still uncertainty on whether banks will recognize the losses at any point in time. Additionally, there is is little evidence that banks with higher NPL ratios tend to lend less; instead, a more relevant determinant of lending is constituted by low capital ratios.

Entering in the second topic, speakers discussed the concentration of sovereign exposures in the context of the overall balance sheet of the banks. Analyzing banks in three different countries, such as Germany, France and Italy, with very different business models, the speakers argued how they tended to follow different incentives. Countries with more dominant investment banks appear to demonstrate less concentration, as they rely more on market financing; compared to that, for countries with more retail-oriented banks the yield differential on peripheral government bonds is considered to be less of an issue at first sight, but becomes more important in the medium-to-long term, when they have to issue bonds to fulfill the MREL requirements.

The slides of the presentation are available for downloading at this link.