On 16 December 2020 the European Commission (ECOM) presented its strategy to prevent a future build-up of non-performing loans (NPLs).
With the COVID-19-induced recession underway, the volume of NPLs is expected to rise on an EU-wide level. Based on key lessons learned from the economic crisis of 2008, (pre-emptive) measures may be needed to prevent NPLs accumulating on banks' balance sheets. This should help preventing slowed down bank lending. Besides Member States support schemes and, inter alia, the European Banking Authority (EBA) reactivating its Guidelines on legislative and non-legislative moratoria, ECOM has adopted a strategy to address NPLs in the aftermath of the COVID-19 pandemic. ECOM's NPL strategy builds upon a set of measures, previously implemented in the context of ECOFIN's NPL action plan of 2017 and is centred around four main goals:
1. Development of secondary markets for distressed assets
Easier market entry and participation may provide for a liquid secondary market for distressed assets. This in turn should provide banks with the possibility to move NPLs from their balance sheets by selling them to third-party investors. ECOM sees its proposal for a Directive on credit servicers, credit purchasers and the recovery of March 2018, as a key stepping stone, also in preventing a weakening of debtor protection while allowing for effective NPLs resolution. Interinstitutional negotiations are still awaited in this regard. ECOM also proposes targeted improvements to the securitisation framework for banks' non-performing exposures (NPEs).
Improved data infrastructure and data quality, in particular comparability, are considered fundamental to market transparency. The strategy foresees that this could be reached via establishing a central electronic data hub, storing anonymised data e.g. on past NPL transactions, post-trade transaction details and sale prices. Such information could then be exchanged between all parties involved (sellers and purchasers, credit servicers, NPL platforms and asset management companies). ECOM is exploring different ways to implement the concept of such an NPL-Datahub, one of which could be the use of the existing European DataWarehouse (ED).
For some jurisdictions, including notably Austria, it will be interesting to see how obstacles to efficient secondary trading, including around banking secrecy rules, will be removed.
In early 2021 ECOM aims to develop, together with EBA, a suitable approach to the regulatory treatment of purchased defaulted assets and the risk weights that banks need to apply to calculate capital requirements under the Standardised Approach for credit risk. Under the present rules, the risk-weight to be applied by a seller of an NPL may be lower than for the buyer of the same NPL. This is due to provisions/write-downs (i.e. credit risk adjustments) being accounted for when made by the institution itself, not, however, when accounted for in the transaction price of the exposure. ECOM aims to tackle this discordance, in particular.
2. Support the establishment and cooperation of national asset management companies (AMCs)
National AMCs are considered an important tool for moving NPLs from banks' balance sheets. Besides offering flexibility in their approach to recovery for households and businesses, Member States may combine the support offered by AMCs with other alternative impaired assets measures such as securitisation-based approaches, guarantees or asset protection schemes (APSs). ECOM aims to support Member States in setting up national AMCs. Eventually AMCs would act in an EU-network of AMCs, benefiting from transparent data, coordination and best practice expertise. Such AMC network should be underpinned by the NPL-Datahub, while upholding any relevant data protection rules for debtors.
3. Reform the EU's corporate insolvency and debt recovery legislation
According to the strategy, further harmonisation of applicable insolvency frameworks across the EU will increase legal certainty as regards recovery of defaulted bank loans. At the same time, the EU's high standards of consumer protection should be upheld. In the short term, ECOM urges the European Parliament and the Council to swiftly reach an agreement on ECOM's proposal on minimum harmonisation rules on accelerated extrajudicial collateral enforcement. Also, the implementation of Directive (EU) 2019/1023 on preventive restructuring frameworks (deadline set for 17 July 2021) is believed to mitigate the risk of loans becoming non-performing in cyclical downturns, while on the other hand accelerating the liquidation of non-viable businesses with no positive projections. As part of the 2020 Capital Markets Union Action Plan, ECOM seeks to harmonise substantive insolvency law such as insolvency proceeding triggers, the ranking of claims, avoidance actions, asset tracing, and asset valuation.
In addition, the Recovery and Resilience Facility (RRF) is set to incentivise insolvency law reforms by Member States.
4. Precautionary measures in the COVID-19 context
In light of a spectrum of different economic responses to the COVID-19 crisis by Member States, ECOM calls on Member States to mitigate the potential impact of COVID-19 on the banking sector. By reference to its Communication on banks' key roles in the COVID-19 crisis, ECOM refers to precautionary measures under the Bank Recovery and Resolution Directive (BRRD). The application of these precautionary measures usually requires that a bank is failing or likely to fail. Article 32(4)(d) BRRD acknowledges exceptional situations where the need for extraordinary public financial support will not trigger a declaration that an institution is failing or likely to fail. The Commission considers that the exception in Article 32(4)(d)(iii) BRRD may be applied during the COVID-19 crisis to banks that are financially viable but may be impacted by a system-wide event such as an EU-wide crisis or a Member State-wide crisis. As a result, Member States could provide institutions with temporary capital to deal with severe adverse conditions thereby strengthening confidence in the banking sector.
The strategy combines measures at Member State level with a Pan-European effort. ECOM's proposed structural changes on a Pan-European level include enhanced transparency and comparability of NPL data, all while debtor protection is upheld. The success of both national and European measures will, however, ultimately depend on a range of legal acts harmonising insolvency and enforcement frameworks across the Member States.
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