On 30 January, during a seminar organised by the ESM (European Stability Mechanism, also known as the ‘bailout fund’), Andrea Enria, Chair of the European Banking Authority (EBA), as part of a broad analysis of the risks and challenges facing the European banking sector, outlined the fundamental features of a possible European financial vehicle – an Asset Management Company – that could take on non-performing loans from European banks in difficulty and then manage them for a predetermined period of time (a maximum of three years). The AMC would essentially be a form of bad bank, financed mainly with private funds but with a public guarantee, which would purchase non-performing loans from banks at their economic value (possibly lower than the value at which they are carried on the balance sheet, but higher than the value at which they could immediately be sold on the market to private operators), and then resell them within 3 years. Should the sale not be possible or take place at prices lower than the transfer value, the home Member State of the originally selling bank would step in, and the ‘gap-filling’ intervention covering the difference between the value of the assigned receivable and the realisation price would have the nature of a precautionary recapitalisation of the selling bank, compatible with the BRRD directive. The proposal would therefore not entail any risk sharing between the banking systems of different countries, since the recapitalisation of the bank would be borne by the country in which the bank has its registered office.
This is therefore a European solution, with respect to which the specific features of individual countries would need to be examined in greater depth. Among the slides used in the speech cited[1], one in particular (p. 10) highlights that, according to data at the end of June 2016, Italy is the only country with the twofold characteristic of a high share (16.4%) of non-performing loans (NPLs) in total gross loans and a large volume of non-performing loans (€276 billion). Among the other countries with a high incidence of the non-performing loan problem (Cyprus, Greece, Portugal, Slovenia), only Greece has an overall gross stock above €100 billion, while the only countries with non-performing loans above the €100 billion threshold (in addition to Italy and Greece already mentioned) are France (€148 billion) and Spain (€141 billion), but with much lower incidences (3.9% and 6% respectively). In addition to the size and incidence of the phenomenon, there are many differences that characterise the various financial systems, such as the set-up of the legal system, the degree of capitalisation of the banks, the phase of the real estate cycle in which the processes of realising collateral would take place, and the ‘vintage’ of the non-performing positions. These differences and their consequences must be borne firmly in mind, otherwise there is a risk of introducing a further element of ‘forced homogenisation’ into a system (the overall European financial architecture) that is already subject to a crisis of development precisely with regard to the need to homogenise, in a short time, legal systems and practices that were originally distant from one another.
Secondly, the solution put forward highlights the relationship between recoverable value and recovery time. Time is in fact one of the ‘net contributions’ that the outlined solution brings to the context (the absence of an outright acquisition of non-performing loans from the banks and the inhibition of loss mutualisation between different countries in fact rule out net contributions in terms of value). However, the influence exerted on recovery time, as well as on recoverable value, by environmental factors, in particular the legal and judicial system and the state of the market for the assets securing the loans, must not be overlooked. With regard to time, it should also be observed that the AMC issue has an indirect and negative temporal implication that affects other possible solutions that may be under way: the discussion – without a decision – of a possible solution in fact tends to be a factor delaying solutions on which the various parties were independently working. Setting a three-year term, moreover, does not help to support the value of the assets, in a market that, by its nature and even more so in the current conjuncture, is a buyer’s market. It would be more appropriate to provide neither a short deadline nor a maximum amount of resources that can be deployed: only the indeterminacy of those two elements can act as an effective backstop against the erosion of the value of the assets to be liquidated.
Thirdly, the very name ‘asset management’ draws attention to the central issue of a substantial part of non-performing loans, the bad debts (sofferenze), for which it is right that the logic should shift from a credit-based approach to one of mere asset valorisation, in particular for bad debts secured by collateral. If the approach changes, the management tools and the structures entrusted with that management must also be different. Past banking crises and the comparatively successful experiences that have characterised them highlight certain fundamental aspects to which any intervention on the NPL issue of banks, also in view of the outcome of the solutions previously used, should adhere:
- limiting the risk of possible distortions of competition arising from partial and/or sequential solutions or solutions of a different nature (private/public);
- acting quickly, limiting announcements as far as possible, unless they are immediately followed by corresponding action;
- acting definitively. Gradual solutions introduce elements of intertemporal distortion that are difficult to manage and tend to destabilise the expectations of economic agents, increasing the uncertainty of the environment;
taking an overall and medium-term view, rather than limiting oneself to the most acute and immediate situations. The value of assets and, above all, the confidence of customers and the mutual confidence between counterparties are by their nature notoriously systemic in character.
Source:
Anolli M., A European bad bank (Una bad bank europea), 2017
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