Thanks to the development of the secondary market for non‑performing loans (NPLs), the levels of NPLs on banks’ balance sheets have fallen to historical lows throughout the European Union in recent years, according to a recent paper by the NPL Advisory Panel. The paper provides a detailed overview of the state of the NPL market in the EU, highlighting how the market has evolved since the global financial crisis, when several actions were taken to address the historically high levels of NPLs in banks’ balance sheets. The panel is a consultative body, set up by the European Commission in the aftermath of the COVID‑19 crisis, with the aim of providing advice and expertise in the area of NPLs.
The current state of play
NPLs are mostly bank loans that are subject to late repayment or unlikely to be repaid by the borrower. NPLs can negatively affect banks which have to put aside more money to cover the NPLs’ incurred and expected losses. This can in turn reduce banks’ capacity to lend to households and companies. When banks face a large build‑up of NPLs and lack the staff or expertise to properly service them, they can outsource the servicing of these loans to a specialised credit servicer or transfer the NPL to a credit purchaser with the experience needed to manage it.
After the euro area debt crisis in 2010‑12, the issue of high NPL levels took on a systemic dimension in several Member States. However, at the time, NPL secondary markets were underdeveloped. Therefore, the 2017 action plan to tackle non-performing loans in Europe and the subsequent 2020 action plan to tackle non-performing loans in the aftermath of the COVID‑19 pandemic were adopted to foster the development of the secondary market for NPLs, and to facilitate the disposal of the historically high levels of NPLs being held on banks’ balance sheets. The NPL Directive’s application is expected to further foster the development of NPL secondary markets.
The paper by the NPL Advisory Panel shows that, during the last decade, NPL levels on banks’ balance sheets have reduced from 6.5% at the end of 2014 to 1.9% in Q4 2024, thanks to the development of the NPL secondary market. During the previous years, the sustained activity in NPL secondary markets helped banks to dispose of their (sometimes very large) NPL portfolios. Then public support measures contributed to keeping NPL levels low in the face of the Covid‑19 crisis. The current low level of NPLs is also thanks to a more proactive approach by the banking sector that recognises NPLs early on and has more options to dispose of them on an ongoing basis.
As regards NPL secondary markets, activity has slowed recently, due to the low levels of NPLs on banks’ balance sheets. The average size of secondary market deals has diminished. This can also be seen in the limited number of NPL securitisation deals, which have decreased even more. The average pricing shows a significant variability. The lower activity in NPLs is also encouraging market interest in related segments, like sub‑performing loans and re‑performing NPLs (SPLs and RPLs). Another segment with growing interest is that of secondary sales of NPLs portfolios in a drive for profits and efficiency. Most of the players in NPL secondary markets believe that they are working well, according to a survey carried out by the NPL Advisory Panel in the first half of 2024.
The servicing sector has grown and developed significantly over the last decade. The sector is becoming increasingly concentrated, with a number of players now operating cross‑border. Overall, the sector seems to have performed well over the last decade in terms of profitability and resilience. However, during 2022‑2023, its performance was slightly weaker, partly due to the decrease in the level of NPLs.
The trend towards consolidation and the development of a truly EU dimension in the servicing sector appear to be limited by the fragmentation of NPL markets along national lines, in particular because of the differences in civil and insolvency laws as well as judicial proceedings. On forbearance, debt collection and fees, the analysis shows a similar fragmentation along national lines. The complex web of different rules and practices across the Member States poses a significant challenge to credit servicers who operate cross‑border or who are dealing with a cross‑border situation. It also means that consumers in the EU can be treated differently depending on their country of residence and potentially also based on the type of outstanding debt.
The way forward
The EU NPL secondary market has developed considerably over the last decade and could well grow further in the future. Looking forward, because of the uncertain business climate, continued monitoring of the NPL secondary market is warranted. The low level of NPLs and the changed macroeconomic conditions may limit the profitability of the servicing sector, while driving more consolidation. Going forward, it will be important to continue tracking the development, performance, and resilience of the servicing sector.
The paper finds that in the future it may be worth further analysing the potential barriers hindering the further development of the secondary market, for instance as regards the different rules covering certain contiguous sectors (e.g. NPLs vs SPLs and RPLs); or concerning price discovery. While data availability and quality only seem to be a major issue for a fraction of the market, more work may be needed in this domain to identify potential improvements.
Related links
Non‑performing loans (NPLs)
Non‑Performing Loans (NPL) Advisory Panel
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