On 10 July 2017, the Commission announced the public consultation on the development of secondary markets for non-performing loans (NPLs) and distressed assets. Following the commencement of this public consultation, the Council introduced its Action Plan for NPLs.
As of the end of 2016, the outstanding volume of NPLs in the EU was EUR 1 trillion. The Council considers a solution for NPLs paramount to boost bank profitability, remove a lock-up of capital and reduce the risks for the viability of banks with high NPL ratios. While the Council considers it the responsibility of each bank to manage its NPL portfolio, certain actions need to be taken to provide banks with a functioning framework to resolve their NPL issues.
The actions to be taken on a legislative level will broadly serve the following goals:
- a secondary market for NPLs / distressed assets will be developed;
- insolvency and debt recovery frameworks need to be reformed; and
- banking supervisory rules need to be screened for impediments to resolve NPL issues.
In order to achieve these broader goals, the Council has invited various European institutions such as the European Central Bank (ECB), the European Banking Authority (EBA) and the Commission to make proposals for legislative improvements relating to the NPL sector. The action plan spans from summer 2017 to the end of 2018 and comprises, among others, the following:
(A) By summer 2017:
- the Commission shall issue an interpretation of existing supervisory powers in EU legislation with a view to identifying their usability as regards banks' provisioning policies for NPLs;
(B) By the end of 2017:
- the Commission shall develop a "blueprint" for setting up national asset management companies (AMCs) that shall be used for asset relief measures. The proposal shall take into account the BRRD, the SRM and State Aid rules; AMCs would serve as centralised companies engaging in NPL sell and purchase transactions and kick-starting the market;
- the Commission shall publish the results of an analysis (from a bank creditor perspective) of national enforcement and insolvency rules with a view to a reform of the EU wide insolvency regime;
- EBA, ECB and the Commission shall propose initiatives to strengthen the data infrastructure with uniform and standardised data for NPLs; the implementation of NPL transaction platforms shall be considered;
- EBA shall issue guidelines for banks on loan tapes setting out minimum information requirements for banks on their own NPL portfolio;
(C) By summer 2018:
- the Commission shall develop a European-wide approach for the development of secondary markets for NPLs with a view to removing impediments to the transfer of NPLs by banks to non-banks and including a harmonisation of licensing requirements for third-party loan servicers;
- EBA shall issue (i) general guidelines on NPL management consistent with the SSM Guidance to banks on non-performing loans for significant institutions ("SSM Guidance") and (ii) detailed guidelines on banks' loan origination, monitoring and internal governance;
(D) By the end of 2018
- the ECB shall implement Guidance to less significant banks on NPLs based on the SSM Guidance;
- the European Systemic Risk Board shall develop macro-prudential approaches to prevent system-wide NPL problems;
- the Member States shall carry out dedicated peer reviews on insolvency regimes across the EU.
The above measures are aimed at reducing existing stocks of NPLs and preventing their future emergence.
As Austrian banking secrecy rules and a 2012 decision by the Austrian Supreme Court have in practice limited disclosure of NPL data to potential investors (other than SSPEs), any initiatives to remove such impediments are expected to promote the Austrian NPL market.
Until 20 October 2017, all citizens and organisations of the EU are invited to participate in a public consultation on the development of secondary markets for NPLs and distressed assets and the protection of secured creditors from borrowers' default. The participation is possible exclusively via an electronic platform set up by the Commission here.
Input from stakeholders will provide the Commission with an informed basis for its work on legislative measures with the aim to remove or reduce impediments of secondary markets for NPLs.
The questionnaire is comprised of 40 questions on various aspects related to NPLs and how to create a secondary market.
Accelerated Loan Security
The most interesting part of the questionnaire relates to the possible introduction of a new collateral instrument, the so-called "accelerated loan security".
This instrument would be a contractual arrangement between a bank and its debtor with specific features that facilitate enforcement of the security in case of debtor default:
- under an "accelerating clause", the bank would take ownership of the assets serving as security (by way of retention of title or transfer of ownership of movables or immovables – depending on national law rights and options);
- in an easy out-of-court procedure the bank would be entitled to sell the assets and use the proceeds to satisfy the secured obligations; and
- the minimum value of the assets shall be established in advance by an independent expert with a possible surplus to be surrendered to the debtor.
While many questions about the practical implementation of such an instrument remain to be answered, the Commission pointed out in the questionnaire that the instrument shall be fully compatible with existing national laws, including insolvency laws (meaning that the introduction of the accelerated loan security instrument shall not be achieved by new harmonised rules). Also, certain categories of debtors – such as consumers or non-professional debtors – shall be excluded so that debtors' private homes, for example, may not be subject to the new accelerated loan security.
For Austria, the practical relevance of the new instrument remains to be seen as Austrian law generally allows for a rather flexible out-of-court enforcement of pledged assets (but outside financial collateral does not permit the creditor taking ownership of the pledged assets prior to enforcement).