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A European Commission paper due to be published in December will discuss ideas including boosting secondary markets for buying and selling non-performing loans (NPLs) and creating a network of national bad banks across the EU. It will also seek to tackle anomalies in the bank capital regime for distressed assets. Europe is braced for a surge in insolvencies once national business support programmes lapse next year.
Brussels officials told the Financial Times that the commission wanted to avoid the mistakes made in the last financial crisis more than a decade ago, when a failure to quickly tackle NPLs impaired banks’ ability to bolster lending once the recovery gathered strength. “Drawing lessons from the last severe economic crisis, it is imperative to address a renewed build-up of NPLs on banks’ balance sheets — as early as possible — in order to combat the implications of the pandemic,” the commission said.
“Further structural measures” might be needed to “prevent the accumulation of NPLs over the medium term”, the commission said. The report has not yet been completed and is expected to be released in the middle of the month. It is being spearheaded by new financial services commissioner Mairead McGuinness. A key focus is on the private market for the sale and purchase of bad loans, as officials seek to ensure banks can offload NPLs and keep their books in order.
The European Banking Authority has put forward data templates to help investors analyse NPLs, but these are not heavily used, and officials want to boost uptake and further enhance information available to investors — something the European Central Bank has long advocated. Among the ideas in play are making the templates mandatory or creating a central data hub for the region.
Brussels also wants to tackle discrepancies in the risk weights attached to NPLs in standard bank models, which can vary depending on whether the assets are being bought and sold. It will discuss best practices in national insolvency and debt recovery regimes. Although it will float the idea of a network of national asset management companies, a proposal for a Europe-wide bad bank set out by Andrea Enria, chair of the ECB’s supervisory arm, has not won traction in Brussels.