In emerging Europe, the share of loans classified as nonperforming—many of them household mortgages—have exploded from 3 percent before the crisis to 13 percent at the peak. NPLs in some parts of the Baltics and Balkans are already at par with previous financial crises elsewhere. Our analysis finds evidence that nonperforming loans are indeed a serious drag on credit supply and economic growth. They drive up banks’ funding costs and interest margins, and at the same time drain their profits and capital. On the credit demand side, over-extended households and businesses are reluctant to consume and invest.