New “tools” from the European Central Bank

Type:
Opinions & Studies

Date:
2020-10-08

In an effort to anticipate future NPLs, the European Central Bank is looking for new ways to tackle the crisis. Either by setting up the first European bad bank or the first NPL sale platform, it is obvious that unprecedented solutions are expected to be approved in the foreseeable future by the ECB. While some E.U. countries had already passed the test of the previous major economic crisis, others were not as prepared.

A. Genesis of a European “bad bank”?

Why would we need it?

An increasing number of countries in the European Union are looking for a joint solution as a response to the increasing levels of Non-Performing Loans that will follow as a result of the pandemic. According to a vulnerability analysis of E.U. banks published by the European Central Bank, in a best-case scenario, meaning that the lockdown measures applied in spring will not be repeated, E.U. countries are looking at a smaller recession in 2020 of approx. -8,7% GDP. On the other end, a second lockdown in Europe will force a severe recession up to -12,6% GDP.

Is there a precedent?

Western economies have already experienced the creation of national bad banks following the aftermath of the 2008 crisis. In the UK, the bad bank is known as the UK Asset Resolution, Spain has SAREB, Germany founded the FMS and in Ireland, the bank is known as NAMA. Italy is the only country whose bad bank also known as AMCO is still actively purchasing NPL portfolios from banks.

Who will run it?

While not yet decided, if the project receives the green light, the European Central Bank will be in charge of setting-up and supervising the “bad bank”.

What should it do?

The “bad bank” will be looking to support the post-Covid economic recovery, by providing a shield to the EU commercial banks so that they may continue to lend.

Primarily it will undertake the collection and coverage of most Non-Performing Loans created in the Euro-business system.

How will it work?

If put into action, the bad bank would issue bonds that would be bought by the EU credit institutions which would swap in exchange their portfolios of non-performing loans.

What are the major difficulties in the way?

One major problem would be the central management of distressed companies and assets. Not surprisingly, each country follows a different insolvency framework with tailored measures according to their profile.

 

B.European Distress Sale Platform

The European Central Bank is looking to open the market of Non-Performing Loans transactions through an online sale platform designed to replicate the same principles as Amazon or eBay.

The latest alternative comes at a time when the European authorities are fighting to counter the Covid situation, which is expected to flood the markets with new waves of NPLs for many years to come.

It is crucial for commercial banks to pursue the sale of non-performing loan portfolios with the clear aim of freeing up their balance sheets. Historical evidence of NPL transactions in the E.U. indicates a market predominately controlled by the major investment funds.

By setting up an online NPL sale platform, the ECB is looking to extend the list of buyers, by allowing smaller investors to participate in the bidding process. This is expected to increase the overall selling price and mostly by giving access to a new type of investors to the existing portfolios.

Should the project be authorized it will come under the authority of the Single Resolution Board, the EU agency that finances banks in distress.

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