EU banks' bad loans worth about 1 trillion euros end-2014: IMF paper

High levels of non-performing loans (NPLs) to companies, particularly small and medium-sized firms, were dampening credit supply and tying up bank capital that could otherwise be used to increase lending.

"Given the urgent need to support Europe’s still tentative

recovery, resolving NPLs expeditiously to promote new lending is of first-order macroeconomic importance," IMF staff said in a discussion note.

Non-performing loans were particularly high in the southern part of the euro area, where corporate debt had reached "acute" levels, and in eastern and southeastern Europe.

In euro area countries, the stock of bad loans reached 932 billion euros, or 9.2 percent of euro area gross domestic product, at the end of 2014.

Only a handful of countries, including Estonia and Germany, recorded a decline in the share of NPLs to total assets compared with their highest post-crisis levels, figures cited in the paper showed.

By the end of last year, NPL ratios reached exceptionally high levels in Cyprus, where they topped 40 percent, and Greece, at 35 percent. Still, in Ireland and Spain, NPL ratios started to decline in 2014.

The paper recommended better oversight to encourage banks to write off or restructure impaired loans; reforms to enhance debt enforcement and insolvency frameworks and improvements to market infrastructure to allow distressed debt markets to develop.

A European Central Bank report found that at end-2013, euro zone banks' non-performing loans were worth 879 billion euros.

(Reporting by Krista Hughes; Editing by David Gregorio)