ESA joint committee united in NPL concerns

Joint Committee’s stance on NPL crisis likely to boost support for Andrea Enria’s call for Europe-wide “bad bank”

The heavy build-up of non-performing loans (NPLs) throughout EU banks has emerged as a central concern in a new report from the Joint Committee of the European Supervisory Authorities (ESAs).

In their spring report on risks and vulnerabilities in the EU financial system, the European Securities and Markets Authority (ESMA), European Insurance and Occupational Pensions Authority (EIOPA) and European Banking Authority (EBA) argue that the continent’s NPL challenges require a “comprehensive, coordinated” response.

According to the ESAs, that response should play out along three work streams:

  1. supervisory action to ensure adequate identification, management and provisioning of NPLs;
  2. structural reforms to improve loan recovery processes; and
  3. addressing impediments on the demand side and for developing an efficient secondary market in NPLs.

“Recognition and provisioning of NPLs, as well as NPL resolution strategies, are fundamental in ongoing supervision,” says the report. “Supervisors should encourage banks to deal with their NPLs in a more active way.”

Addressing structural problems while dealing with NPLs, the report notes, should include “measures to enhance efficiency of the judicial system and its processes, to remove tax disincentives to provisioning” and to ensure there is adequate transparency about the issue across the entire sector.

“Legal and accounting impediments should also be addressed,” it urges. “Measures should moreover include steps to develop more efficient secondary markets for NPLs.”

Such measures, the ESAs suggest, may include initiatives “to facilitate debt securitisation and the establishment of asset management company (AMC) solutions”.

In perhaps its most significant remarks on NPLs, the report says: “A common European approach for AMC – rather than a patchwork of national solutions across the EU – could be one way to address challenges in secondary markets for distressed debt, and promote clarity on the application of state aid and bank recovery and resolution directive (BRRD) rules.”

As they come from all three of the ESAs, those words will no doubt bolster support for EBA chair Andrea Enria’s view – outlined in this previous story – that a “bad bank” AMC, backed by the public sector, should be set up to help resolve the region’s NPL crisis.

As Enria said in January, “You need the public sector to bridge the gap between the inefficient secondary market today and an efficient secondary market tomorrow.”

Find the ESAs' full report here.

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