High and rising levels of nonperforming loans in the euro area have burdened bank balance sheets and acted as a drag on bank profits. Banks, striving to maintain provisions to cover bad loans, have had fewer earnings to build-up their capital buffers. This combination of weak profits and a decline in the quality of bank assets, resulting in tighter lending standards, has created challenging conditions when it comes to new […]
As recognized in our Global Financial Stability Report, actions taken by the European Central Bank have helped remove investors’ worst fears. Now policymakers at both the national and euro area level will need to build on these. The stakes are high. For instance, if pressures continue, total assets of major banks in Europe could shrink by as much as $2.8 trillion, possibly leading to a contraction in credit supply in the "periphery" by 9 percent by the end of 2013.