Nonperforming Loans in Western Europe – A Selective Comparison of Countries and National Definitions

Abstract

in the majority of Western European countries seem to endorse the rule that for a loan to be nonperforming, at least one of two (primary) elements has to be present: (1) principal or interest 90 days or more overdue, and (2) existence of underlying well-defined weaknesses of loan or borrower. However, there are also other (secondary) elements that have an impact on NPL measurement and the comparability of definitions: the question whether a restructured loan is classified as NPL or not, whether the presence of a collateral or guarantee influences loan classification or not, whether the full outstanding value or only part of a loan is reported as nonperforming, and whether a bank is required to downgrade all loans to a given debtor if any of these loans are classified as impaired or not. While these elements may introduce upward or downward biases into some nations ’ NPL definitions and ratios, and these would need to be further investigated, the above-outlined NPL rule appears to constitute a feasible yardstick for most of the countries mentioned above. Moreover, this definition is also in line with a draft EU ruling for a Capital Requirements Regulation (CRR).