July 29, 2019 4:04 pm

Bad loans continue to burden Europe’s banks

Europe’s banks still bear the default risks of their bad loans. According to the Wall Street Journal, the banks have not yet completely disposed their problem loans. Rather, they often resort to complicated securitisation transactions when selling, which means that they continue to be affected by the risks.

According to the media report, European banks have now removed almost half of their bad loans from their balance sheets since the financial crisis. However, some of these loans have by no means disappeared completely. While some banks are selling the bad loans immediately, others are outsourcing them to a special purpose vehicle. An investor then buys the riskier parts of these securitisations, while the bank holds on to the higher-quality positions.

Credit institutions can remove problem loans from their balance sheets in this way, but still bear part of the risk from the new securities. As a result, banks are not in a position to grant new – urgently needed – loans to the economy. For the authors of the article one thing is certain: the behaviour of banks is one of the reasons why the European financial sector has not yet been able to fully recover from the financial crisis. The Wall Street Journal

This post was written by Jens Secker

(Image rights: istockphoto.com/GoodLifeStudio)

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