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NPL update from 2021 EBA stress test

By Burkhard Heppe

CTO

Published Wednesday 25 August, 2021

We analyse credit data from the EU-wide bank stress and the risk dashboard published by the European Banking Authority (EBA).

Regulatory disclosures of data related to non-performing loans attract much interest currently as European authorities aim to improve the transparency and efficiency of the market non-performing bank loans (NPL). We discuss the usefulness of the regulatory disclosures for market participants who trade in NPL. The EBA stress test projects credit losses in two macroeconomic scenarios reflecting different recovery paths from the steep recession in 2020 resulting from the restrictions to fight the Covid-19 pandemic. The data includes projections for new NPL created in the years 2021 to 2023 and hence can provide useful insight in the potential supply of NPL. Banks and investors can benefit from the stress test data as benchmarks to assess the probability of default, loss given default and loan loss provision parameters used by bank, country of exposure and exposure class. The projections from the baseline scenario are broadly in line with earlier predictions to see a doubling of the NPL ratio in many lending segments. The strong recovery in 2021 makes the adverse scenario less likely to materialise while still providing interesting insight in the sensitivities of default and recovery to changes in the macroeconomic environment.

You can access the full technical paper by clicking here:

NPL update from 2021 EBA stress test