Independent review and analysis

Tackling Europe’s non-performing loans (NPLs)

Even though more than a decade has passed since the global financial crisis, many banks, particularly in the EU, have struggled with high levels of NPLs.  These loans have a negative effect on bank profitability and large numbers of bad loans reduce bank equity, with the result that it becomes more difficult to originate new loans.

The share of NPLs in the EU is higher than before the economic crisis and EU officials have been concerned about the stability of financial markets for some time, particularly in jurisdictions where regulation and supervision has not been sufficiently robust.

Since November 2017, the European Commission has been considering plans to force banks to set aside more capital for new loans that become non-performing and these measures will now be adopted following approval by the EC.  While the objectives are laudable, the aim being to reduce risks in the banking sector particularly in southern Europe, the plans were not universally supported.  For example, the European Association of Cooperative Banks suggested that regulators and Central Banks already had enough tools to supervise banks with high levels of NPLs.

Despite various objections and with the uncertainty around Brexit, the requirements need to be considered by banks and holders of mortgage assets even if their operational area is geographically limited to the UK.  This is because the plans will be announced in the Official Journal of the EU during May and the process means that the regulations will come into force the day after publication.

Commentators generally agree that the new requirements will result in a new wave of organisations offloading ‘capital hungry’ NPLs.  The Commission is helping this process with two new measures; the development of a secondary market for bad loans (including common standards for the authorisation and supervision of credit servicers) and a blueprint for national asset management companies to buy and manage bad loans.

Rockstead has significant experience in the oversight of NPLs, forbearance procedures and loan servicer firms.  That experience also covers acting as due diligence providers for buyers and sellers of NPL portfolios across Europe.  To date our work has focused on corporate culture, risk appetites and internal processes – call us to chat, to see how we can help your firm.

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