A blockbuster asset management company (AMC) under EU supervision should be set up to take on around a quarter of the bloc’s non-performing loans (NPLs), according to a leading regulatory voice.
Speaking at a Luxembourg seminar on banking risks, Andrea Enria – chair of the European Banking Authority (EBA) – noted that if the region’s banks maintain their current, €1 trillion level of bad-loan recognition, it would take the EU longer than Japan to return to pre-crisis NPL numbers.
In his assessment, NPL sales have been marred by the absence of a cohesive market, which has kept prices at rock bottom.
With that in mind, Enria proposed that the “bad-bank” AMC would purchase the relevant loans at specially assessed “real market values”. It would then be the AMC’s task to offload the loans onto the secondary market within a set timeframe – most likely three years.
Enria explained: “The average coverage ratio in Europe is 44%, or 60c on euro book value. The market price is around 20c. It is this steep, bid-ask divide that is blocking the secondary market for NPLs in Europe.
“If there was an efficient secondary market for NPLs, their real economic value would move to 40c. You need the public sector to bridge the gap between the inefficient secondary market today and an efficient secondary market tomorrow.”
He added: “The real economic value would be reflected in state-aid practices. This is the form of intervention that an AMC could take.
“It would push banks to transfer their NPLs to the AMC at their real economic value. The AMC would then face a timeline to dispose of the assets in the secondary market.”
Fellow speaker Klaus Regling, head of watchdog the European Stability Mechanism (ESM), welcomed the concept. However, he highlighted the “sheer complexity and size” that the bad bank would need to have – particularly in order to deal with private-sector debt.
“There are many issues that need to be sorted out,” he said: “corporate governance, funding and the role of governments. The AMC will have to issue billions of euros of debt. That is no simple task – I speak from experience, because it is what we do at the ESM.
“The target is to move €200-250bn of NPLs to the AMC. This means you would have to transfer millions of loans. In Greece alone, there are more than half a million corporate and SME NPLs.”
Regling pointed out: “One lesson we learnt from working with programme countries is that a bad bank should also function as a ‘work-out bank’, which resolves the over-indebtedness of borrowers.
“It should not just be a vehicle to clean up the balance sheets of banks, so as not to simply shift the problem between the public and private sector. If the problem of over-indebtedness is not dealt with, it will come back to haunt us later.”
As such, Regling added: “I suggest other measures be taken in parallel while we work through the complexities of an AMC. The ECB has already started a programme assigning targets to banks to reduce NPLs.
“A comprehensive solution to addressing the issue of NPLs would be beneficial for the euro area economy because it would help banks to provide more credit. And, equally important, it would help financial integration.”