Non-Performing Loans (NPL): 

The discussion on reducing non-performing loans (NPLs) in Europe is gaining momentum. Following the ECB’s Guidance to Banks on Non-performing Loans and the Stocktake of National Supervisory Practices and Legal Frameworks in Europe related to NPLs, three important events have taken place in just one week:

• the EU finance ministers initiated a focused action plan,
• the EU Commission started consultation on secondary markets for non-performing loans and
• the European Systemic Risk Board (ESBR) published its report entitled Resolving NPLs in Europe.

European banks are groaning under the burden of NPLs – totalling around €879.8 billion in Q4/2016. But this burden is distributed very differently at the same time. Ten countries have an NPL rate of over 10% – more than four times higher than in Germany (2.5%). On average, at 5.1% European banks’ NPL rate is much too high for the banking environment to be pronounced healthy. A long-held concern is that the high NPL rate will not just restrict bank lending, but cripple vast areas of the European economy as a result.

EU finance ministers’ action plan

At a meeting of its EU finance ministers on 11 July 2017, the European Union’s Economic and Financial Affairs Council (or EcoFin for short) agreed on an NPL action plan:

Banks are to be offered stronger incentives to decrease NPLs proactively – without the negative impact of fire sales. In addition to reducing existing stocks of NPLs, the measures are to address preventing them from emerging in the future.

One specific measure, which is now to be looked at, is for instance to develop a blueprint for the potential set-up of national asset management companies (AMCs) for NPLs. But an idea that went a step further of a pan-European bad bank, as was called for back in spring by a prominent source, appears to be off the table for now.

Furthermore several invitations for preparatory purposes are directed to the commission, the ECB, the EBA, the ESRB, the ESMA and the member states.

EU Commission consultation

The first section of the consultation document of the EU Commission dated 10 July 2017 is devoted to the secondary market for NPLs. The Commission believes that selling NPLs is a key factor in solving the problems, but has identified an NPL market in Europe that is underdeveloped when compared internationally and manifests small trade volumes, few investors and vast differences between the pricing expectations of sellers and buyers.

According to the Commission, one of the advantages of selling loans is that due to focused incentive structures and specialisation, investors could act more efficiently in managing and servicing NPLs. However, the Commission remarks that the NPL market exhibits high levels of information asymmetries between sellers and buyers, which in addition to the uncertainty about future cash flows, constrain price discovery processes.

The Commission does however qualify its opinion by pointing out that much as the market is to be facilitated, debtor protection and data secrecy must still be maintained.

Consultation questions regarding transfer of NPLs (short form)

1. Are the secondary markets for NPLs underdeveloped (size, liquidity, structure)?
2. What are the key considerations for banks relating to loan sales as a strategy?
3. What would be the best way(s) of attracting a wider investor base for NPL?
4. Which incentive(s) should be given, which obstacles be removed to achieve 3.?
5. Banks, funds or other entity types as NPL-investors: What are the respective advantages?
6. What are the main concerns linked to each of these investor types?
7. What are potential benefits and risks from a public policy point of view when considering the appropriate legal framework for secondary markets for NPLs?
8. How can one best strike the balance between such dimensions under 7.?
9. Are differences between Member States regarding 7. justified?
10. Are rules applicable in Member States a significant obstacle to NPL-markets?
11. How should debtors be protected?
12. What are the (potential) advantages from specialisation (jurisdictions/ asset classes)?
13. What are the obstacles to operating in NPL-markets across nations? Are they significant?
14. Would EU-rules regarding the transfer of loans be useful? What would be the key elements?
15. Further comments?

The potentially positive role of external, highly specialised service providers – servicers in particular – in the context of loan sales is given special mention. The Commission believes that providers could excel in terms of optimising sales costs, ensuring access to effective servicing platforms and pooling expertise and could therefore motivate opportunistic investors to participate in the market. It also believes that greater participation in trading would lead to more effective pricing. In the Commission’s opinion, the option of outsourcing sales processes would allow banks to concentrate their resources on their core business. 

Consultation questions regarding external servicers (short form):

1. What are the advantages of third-party loan servicers in terms of market efficiency?
2. Are there obstacles (regulatory, legal, and other) to the use of external loan servicers?
3. What are the advantages/risks of outsourcing to external loan servicers?
4. What are the risks for (private household) debtor protection in case of external servicers?
5. In your practice area, is external servicing mainly focused on performing or non-performing loans or both? What are the advantages/drawbacks?
6. Do external servicers focus on a specific asset class? What are the advantages/drawbacks?
7. What specific services are offered by external servicers? Which are the most valuable?
8. Would EU-Rules such as e.g. licensing, supervision, etc. be helpful?
9. Further comments?

Consultation questions regarding possible constraints (short form):

1. Are there particular business practices or codes of conducts? Are they an obstacle?
2. If you are actively partaking in several national markets, do you encounter obstacles?
3. Are there unduly onerous legal restrictions a. on the sale of loan portfolios, b. on outsourcing servicing functions? What would be the remedy?
4. What could be improved to facilitate cross-border activities and/or entry into new markets?
5. Would a common EU approach be positive towards loan transfers and third party servicing?
6. Further comments?

The second section deals with differences between in-court and out-of-court enforcement of secured loans. In the final analysis, the Commission’s goal is a harmonised, contract-based option for the repossession and sale of collaterals should a default on a loan occur (accelerated loan security, ALS) without having to resort to the courts. The banks would then benefit from a much quicker and more predictable time frame in terms of liquidating, more influence on liquidating measures and fewer risks when granting new loans. Due to a broader spectrum of collateral options and therefore better access to loan financing, the Commission also believes that borrowers would benefit from the solution proposed too. However, the Commission does state that private households are not suitable for this solution, which is why the accelerated loan security focus is placed on financial transactions by businesses.

Consultation questions regarding accelerated loan security, ALS (short form):

1. Do similar forms of out-of-court enforcement exist in your country?
2. Do you see benefits in introducing ALS in every Member State?
3. Is ALS a valuable instrument to avoid future accumulation of NPLs in banks?
4. Do you agree with the main features of ALS? Are there any points you disagree with?
5. What other features should ALS have for banks to avoid accumulating NPL?
6. Should ALS be restricted to loans to businesses (primary residence of borrower excluded)?
7. When could ALS be advantageous to borrowers to ensure its willing take-up by debtors?
8. How should ALS be designed to be consistent with preventive restructuring/ insolvency law?
9. How should ALS be designed to be consistent with public and private law principles?
10. How should ALS be designed to be consistent with national collateral legal framework?

The consultation period expires on 20 October 2017.

Your Contacts

Philipp von Websky
pvonwebsky@deloitte.de
+49 211 8772 3867

Albrecht Kindler 
alkindler@deloitte.de
+49 211 8772 3031