In July 2017, the European Union announced two new measures to address the problem of NPLs in Europe. On 10 July 2017, the European Commission launched a public consultation, and one day later, on 11 July 2017, the Council of the European Union laid out an action plan. The two initiatives serve the common goal of reducing the high levels of NPLs held by European banks.
High Levels of Non-Performing Loans in Europe
Since the financial crisis, European banks have accumulated significantly high levels of nonperforming loans (NPL). The European Banking Authority defines NPLs as loans that are at least 90 days past due or unlikely to be repaid without recourse to collateral. At the end of 2016, NPLs in the European Union’s banking system amounted to almost €1 trillion, equivalent to 5.1% of total outstanding loans or 6.7% of Europe’s compound gross domestic product. While individual levels vary across the European Union, ratios of NPLs in some Member States in southern Europe even exceed 40%. Europe’s NPL ratios are considerably higher than in other economies. In the United States or Japan, for example, where the issue of NPLs has been more effectively resolved, NPLs constitute only 1.5% of total outstanding loans.
It is generally understood that high levels of NPLs can cause real threats to individual banks, the financial system and the overall economy. NPLs tie up bank capital, cause higher funding rates, pose risks to a bank’s going concern, shorten credit supply, and drag economic growth. Starting in 2016, task forces within the European Union have been working on strategies to reduce the high levels of NPLs held by European banks. In March 2017, the European Central Bank published new guidance, requiring banks to implement specific strategies and improved risk management techniques for NPL portfolios. Furthermore, the actions now taken by the European Commission and the Council show that NPLs have also become subject to potential legislative measures.
The Action Plan by the Council of the European Union
On 11 July 2017, the Council of the European Union set up an action plan for NPLs, allocating a wide range of policy actions and timelines to the competent European institutions. The plan is designed to establish a comprehensive European strategy to lower the high levels of NPLs in Europe. Underlying the plan, the Council has identified four main policy areas: (i) bank supervision, (ii) insolvency and debt recovery laws, (iii) secondary markets for distressed assets, and (iv) restructuring of the banking system.
Within these areas, there is some focus on the development of strong secondary markets for NPLs. While these markets, until now, have remained relatively small and undeveloped in the European Union, stronger secondary markets would enable effective transfer of NPLs from banks to non-bank investors. Actions mentioned in the plan that could strengthen the secondary markets are, inter alia, streamlined data infrastructure in the form of standardised data production and templates, NPL transaction platforms which serve as data hubs or clearing houses, national asset management companies which acquire NPL portfolios from banks and manage them over a longer time frame, and simplified licensing requirements for third-party loan servicers.
For more information about the action plan, please visit the Council’s website:
The Consultation by the European Commission
On 10 July 2017, the European Commission launched a public consultation on the development of secondary markets for NPLs and distressed assets and protection of secured creditors from borrowers’ default. In accordance with the Council’s action plan, the main focus of the new consultation is to receive information on the current state of secondary markets for NPLs in the European Union. The consultation is intended to inform the European Commission’s work on potential legislative measures. Market participants are invited to contribute through an online questionnaire by 20 October 2017.
The consultation mainly concerns current impediments to the transfer of NPLs from banks to non-bank investors, loan servicing activities by third parties, and cross-border activities. In addition to that, the consultation also discusses the potential introduction of a new “accelerated loan security". According to the Commission, this could be a new type of security right, in addition to the spectrum of existing national security rights. Its core feature could be faster out-ofcourt enforcement, as time-consuming court proceedings in some Member States have deterred some investors from buying NPL portfolios.
For more information about the consultation, please visit the European Commission’s website:
Impacts on the Market for Non-Performing Loans
The action plan by the Council and the consultation by the European Commission are initiatives at an early stage of what promises to become a complex legislative process. While the outcome of this process remains uncertain, expert reports on NPLs shed more light on what future policy options in the European Union might look like:
- On 31 May 2017, a subgroup of the Financial Services Committee, under the Council, published an expert report on NPLs. The report is designed to provide a common understanding of NPLs and relevant policy options. It also served as a foundation for the Council when adopting the action plan. For a full copy of the report, please visit the Financial Services Committee’s website:
- On 11 July 2017, the European Systemic Risk Board published an expert report on resolving NPLs in Europe. The report is intended to contribute to the current debate by providing general and practical guidance with a macroprudential focus. For a full copy of the report, please visit the European Systemic Risk Board’s website:
With stronger secondary markets as a primary goal of the European Union’s latest plan for action, and with increasing regulatory pressure on banks to sell off NPLs, it seems safe to predict that the number and value of NPL transactions are likely to rise in the future.