NPL securitisation – European Commission

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A recent paper by the NPL Advisory Panel argues that securitisation plays an important role in tackling existing non-performing loans (NPLs) and helping prevent their build-up in the future by contributing to a mature EU secondary market for NPLs. 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 role of securitisation

NPLs are bank loans that are subject to late repayment or unlikely to be repaid by the borrower. The paper by the NPL Advisory Panel argues that securitisation represents an important part of the toolbox for addressing the problem of both existing and future NPLs. NPL securitisation can be used as a balance sheet management instrument, allowing banks to substitute a portion of an NPL portfolio with securitisation notes and sell them to third-party investors. This effectively removes the underlying credit risk from the banks’ balance sheets.

After the euro area debt crisis in 2010-12, the issue of high NPL levels took on a systemic dimension in several Member States. At the time, NPL secondary markets were underdeveloped. Therefore, some countries, like Italy and Greece implemented securitisation schemes based on State guarantee, free of State aid. The paper highlights that securitisation based on such schemes (which have now been closed) was instrumental in reducing NPL levels in these markets, as the breadth and depth of the NPL market at the time was not adequate to absorb such large numbers of NPLs through NPL market securitisation. Other Member States relied solely on market securitisation.

To foster the development of NPL secondary markets and allow banks to efficiently reduce their NPLs by selling them to third-party investors, the Commission adopted a comprehensive package of measures, in line with the 2017 Council action plan to tackle non-performing loans in Europe. The measures included rules removing some of the constraints on the development of NPL securitisation, while maintaining extensive and stringent regulatory requirements for NPL securitisation transactions concerning transparency, criteria for selecting and pricing assets, and risk retention.

In response to the Covid-19 crisis and to the potential related increase of NPLs, the Commission adopted in 2020 another action plan to offer Member States and the financial sector the tools to address any rise in NPLs in the EU banking sector early on.

The paper shows that, especially since 2018, a significant number of transactions in the NPL market has contributed to bringing down NPL levels in almost all Member States and has proven to be an effective way to reduce NPL levels. The volume of EU NPL securitisation transactions has also been sizeable. NPL levels have now come down significantly from their previous historic highs. In the EU, NPL transactions totalled about EUR 790 billion for the period 2015-2022, while NPL securitisation deals amounted to about EUR 205 billion in the same period. A fully deep and liquid secondary market for distressed assets across the EU offers banks an efficient way to offload NPLs from their balance sheet, liberating space for new lending to the economy.

The way forward

The EU NPL securitisation market is developing and could well grow further in the future. From this perspective, state guaranteed schemes are not expected to be necessary anymore for the disposal of NPLs. Market NPL securitisation could play a significant role in tackling potentially rising NPL levels in the coming years.

The paper highlights a number of practices that could have a positive impact on debtors, banks, credit purchasers, credit servicers, the market, and society overall. These include preserving the debtor’s business as a going concern, aligning incentives for banks, guarantors, credit servicers and investors, as well as more regular updates of business plans. Better data collection and the standardisation of regulatory disclosures could also improve transparency and help in the development of more efficient markets.

Non-performing loans

NPL advisory panel’s paper on NPL securitisation

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