We propose a comprehensive, pan-European scheme to address the issue of non-performing exposures. We contend that securitisation is the most effective way to sell the bulk of troubled loans because it can rise the transfer price at a level closer to the real economic value, reducing the loss for the banks at bearable levels. Through a numerical example, we describe the main characteristics of a blueprint of securitisation to be implemented at a national level. We argue that this scheme could attract funds from a wide array of investors, while forms of public support can be worked out in terms compatible with the current European rules on state aid.
NPLs are a dominant problem for banks in the euro area as in some countries almost one quarter of loans are not serviced. NPLs represent a real challenge for bank profitability and financial stability. In addition, they constrain credit expansion and delay economic recovery.
Despite some recent progress, slow growth and persistent unemployment as well as low investment interest due to asymmetric information and a wide bid-ask price wedge, make extremely difficult the cleaning of banks’ balance sheets.
A series of options have been suggested with a view to improving conditions in the European NPL market and reinforcing investor confidence respecting at the same time state aid rules. Public intervention measures, such as asset management companies and other co-investment strategies are deemed necessary in order to increase market efficiency and create a virtuous circle of reductions in NPLs and increases in investment and growth much needed in the euro area.
We focus on the restructuring of troubled banks in the Eurozone. First, we review how legacy assets (mostly NPLs) were dealt in various countries (especially Japan, USA, Sweden and Spain), supporting a centralized solution in case of generalized banking crises. Second, drawing on the credit channel literature, we stress the need to differentiate between systemic and non-systemic events. Third, we theoretically advocate a systematic centralised Eurozone level approach to maintain fair recovery rates of restructuring banks’ NPLs. Our paper contributes to the lively debate on how to reinvigorate the EU banking system and thus avoid the related negative macroeconomic consequences.
This material was originally published in a paper provided at the request of the Committee on Economic and Monetary Affairs of the European Parliament and commissioned by the Directorate-General for Internal Policies of the Union and supervised by its Economic Governance Support Unit (EGOV). The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. The original paper is available on the European Parliament’s webpage. © European Union, 2017
The final step in the repair of the EU banking sector is cleaning up legacy assets. Otherwise, all of the work we have done to strengthen banks’ capital and assess the quality of their assets will not have the desired positive impact on new lending into the real economy.
Progress is in train but has been slow to date. Although asset quality issues are particularly relevant in some Member States, this is a single market problem and coordinated action is vital for success.
The ongoing effort of supervisors in pushing banks to take action requires that the supporting infrastructure is in place. This means fixing legal systems, which will take time, and addressing market failures in the secondary market for non-performing loans (NPLs), which can be done now. There are legitimate questions about how this should be done, which are addressed in this paper, but those should not be a cause for delay. Whether it be a single European Asset Management Company or a coordinated blueprint for national governments to enact is less important than taking coordinated action urgently.
The large stock of non-performing loans (NPLs) held by euro area banks should be more swiftly resolved, while avoiding fire sales. We make a case for a comprehensive European solution, combining various NPL resolution tools. Within the NPL resolution toolkit Asset Management Companies (AMCs) may offer significant benefits by bridging inter-temporal pricing gaps for asset classes such as commercial real estate loans. We outline elements of an EU-wide blueprint for country-specific AMCs, including state aid aspects, asset and participation perimeters, asset valuation, capital and funding structure, and governance. In addition to AMCs, internal NPL work-out will always play an important role in NPL resolution, complemented by private information and trading platforms, and securitisation schemes.
Persistently high non-performing exposures (NPLs) in several European countries pose significant challenges to financial stability and are likely weighing on credit growth and economic activity. This paper, which summarizes a detailed IMF analysis (IMF SDN/15/19), examines the structural obstacles that discourage European banks from addressing their problem loans. It argues that a comprehensive approach comprising three pillars is needed to accelerate balance sheet clean-up: (1) intensified banking oversight, to incentivize write-off or restructuring of impaired loans, including fostering more conservative provisioning and time-bound restructuring targets on banks’ NPL portfolios; (2) enhanced insolvency and debt enforcement regimes, and more developed out-of-court restructuring frameworks; and (3) the development of distressed debt markets by improving market infrastructure and, in some cases, using asset management companies (AMCs) to jump-start the market. A variety of facilitating measures could support these three main pillars, including better public registers, the removal of tax disincentives, and debt counseling services.