Lead Organizations

The World Bank, Banque de France. 

Partners

Banque de France.

Challenges

• Elevated non-performing loans (NPLs) and the obstacles that banks face in resolving them could constrain credit growth, with adverse effects on economic activity and job creation;
• Regulators need to a. develop  incentives for banks to work out NPLs , b. strengthen their toolkit for bank restructuring and recovery.

Program Objective

• To share experiences of Euro-Med countries on non-performing loan (NPL) work-outs, and consider whether approaches that worked in one jurisdiction can work elsewhere.
• To increase awareness of the challenges associated with the Key Attributes for the Resolution of Systemically Important Financial Institutions.
• To learn from countries’ experience with using asset management companies as tools for dealing with high levels of NPLs.

Selected Results

• Deepened knowledge/increased capacity: The seminar of the heads of banking in May 2014 contributed to regional integration by bringing together a wealth of experience and promoting shared understanding. It disseminated best practices from around the Mediterranean on non-performing loan (NPL) work-outs and bank restructuring. It helped build capacity to formulate policies in the less advanced countries of the group.
• Improved networks: The seminar led to an informal regional network of heads of banking supervision from Algeria, Albania, Croatia, Cyprus, Egypt, France, Greece, Italy, Jordan, Lebanon, Macedonia, Malta, Morocco, Slovenia, Spain, Tunisia, and Turkey. Participants identified key recommendations for the work-out of NPLs:
  For banks dealing with NPLs: Ensure prudent valuation of collateral, loan classification and provisioning; recognize loss early; be prepared for managing larger amounts of NPLs; and reach out to borrowers early.
  Supervisor role: Develop and test early detection tools; standardize the prudential reporting of classified loans and restructured loans; enforce classification criteria, provisioning and valuation; strengthen loan underwriting; design incentives for speedy work-out; ensure customers receive fair treatment and effective advice; work closely with market regulators and other authorities to help strengthen the quality and accountability of external auditors of banks.
  If NPLs reach high levels, other considerations come into play: coordination of creditors, triage of NPL, out-of-court approaches, tax incentives, management of social impacts of large-scale household debt restructuring, capacity of commercial courts.