Today, on 16 December 2020, the European Commission has presented its new action plan on non-performing loans (NPLs). It is the Commission’s latest effort to deal with the elevated level of NPLs which have been plaguing banks in many member states ever since the European debt crisis. The new push comes ahead of a potentially massive rise in NPLs in the wake of the Covid-19 pandemic. The ECB has recently estimated that the total NPLs of euro area banks might rise to 1.4 trillion euros in an adverse scenario.
The action plan describes tools and strategies to cope with high levels of non-performing debt. Remarkably, it does not entail any major new legislative proposals. Several ideas are presented on how to promote liquid secondary markets for NPLs through an increase of transparency and further standardisation. This section also contains a proposal to lower the existing capital requirements for purchasers of NPLs under certain conditions. The action plan further outlines how bad banks or ‘asset management companies’ could be used to remove NPLs from banks’ balance sheets and how a European network of national bad banks could help improve processes and outcomes. It calls for progress regarding the establishment of accelerated extrajudicial collateral enforcement procedures, which the Commission has proposed before but failed to receive a majority in the European Parliament so far. Finally, it sketches how the existing tool of precautionary recapitalisation established under BRRD can be used in the current crisis.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The basic problem with secondary markets for NPLs remains. We cannot allow that borrowers are being sold like inanimate goods. A high degree of fungibility and market liquidity can only be achieved by reducing borrowers and loans to plain and simple numbers. This is what the Commission tries to promote through enhanced transparency and standardisation. But ultimately, this is incompatible with minimal standards on consumer protection. Moreover, the economics of such an anonymous procedure does not work. Building on the mutual trust between the original creditor and the borrower will achieve better outcomes in most cases. Therefore, truly liquid markets for NPLs must remain a pipe dream.
”In the absence of truly new proposals by the Commission, the coming wave of insolvencies and corporate loan losses in the wake of the pandemic will have to be handled using the existing tools. State aid rules have worked poorly in the past when it comes to precautionary recapitalisation and other public support measures. The action plan does not suggest that the Commission will take a tougher stance on the use of public money in the future. Hence, in a possible Covid banking crisis, European taxpayers will again be called to pay the final bill.”
Background: NPL Directive
The action plan also calls for a swift finalisation of the so-called NPL Directive. The Commission had presented a draft for this directive in early 2018. The original proposal comprised two elements: a legal framework for European secondary markets in NPLs and the establishment of an accelerated extrajudicial collateral enforcement procedures (AECE). Pursuant to the Commission’s plans, AECE would have allowed creditors under certain conditions to enforce collateral outside the regular insolvency proceedings to speed up value recovery. After AECE had received headwinds from both the European Parliament and the Council of Ministers, the topic had been carved out.
Nevertheless, progress has been stalled on the directive until now. Views in the European Parliament have been split on the question of borrower protection. In particular the Greens/EFA and S&D have been calling for strong safeguards when banks sell credit claims to other investors. A move of the conservative groups on this issue could end the blockage and allow a finalisation in the beginning of next year.