EU to encourage secondary market for NPLs

Europe-wide secondary market is seen as a key part of helping banks deal with their NPL woes.

The European Commission has revealed plans to foster the development of a secondary market for non-performing loans (NPLs) by removing existing legal and regulatory barriers.

As part of its action plan to reduce NPLs in Europe, the Commission unveiled four key measures to ensure banks better manage their NPL exposure and reduce the risk of their existing NPL books.

In a statement, the Commission said it wants to remove “undue barriers to credit servicing and to the transfer of bank loans to third parties across the EU.”

“There are currently too few investors willing and able to buy NPLs relative to the large amount of NPLs on European banks’ balance sheets. Market entry is difficult for new investors because the business of loan sales is complex and the relevant rules differ considerably across the EU.”

The proposals will look to enhance secondary markets by defining the activities of credit servicers and set common standards for authorisation and supervision, as well as conduct rules to apply in all member states.

According to the commission, the European NPL market suffers from a lack of credit servicers which discourages investment in NPLs by third parties, and it believes new rules for entry conditions and conduct for loan servicers will play a crucial role in the development of the secondary market.

Firms purchasing NPLs will be required to notify authorities of any loan acquisitions, while third-country purchases of debt will need to be conducted through an authorised EU credit servicer.

Consumers will also gain new protection, with legal safeguards and transparency rules to ensure transfers of loans does not affect the rights and interests of borrowers.

The Commission has also proposed creating national asset management companies (AMCs) to help banks clear up parts of their balance sheets by transferring NPLs from bank balance sheets to the national AMCs, which will enable the banks to focus on their core business of lending to households and businesses. It also hopes the AMCs will improve transparency and information to help the secondary market for NPLs and encourage new lenders into the market.

Other measures proposed by the commission to tackle bank NPL exposure include ensuring sufficient loss coverage by banks for future NPLs, providing better value recovery from secured NPLs and providing technical guidance to create national AMCs.

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