The new Action Plan for NPL discussed by European Union finance ministers on Tuesday includes measures to improve secondary markets for NPLs, which are currently underdeveloped and provide little incentive for banks to unload their bad credit.
While an earlier plan to set up an EU “bad bank” that could have absorbed big chunks of bad debt at higher prices was dropped, probably due to extensive differences between local jurisdictions, Ministers agreed on Tuesday a more prudent blueprint to set up national “asset management companies” (AMCs) that could help develop the market for bad loans.
It is kind of a weird idea that public entities buying assets at prices above market average could contribute to market development.
This is an argument already proposed by EBA chairperson Andrea Enria that may work in theory but will hardly have a positive outcome in practice. The idea is that in order to help banks to dispose their bad loans a public entity could step in and pay prices above market average.
The higher price should be justified because the public buyers has no need for profits and can have very cheap (or even cost-less) funding. What’s wrong with this idea?
First it would be a one-off temporary remedy that would delay the long term solution that is well functioning and effective secondary market.
Second any desktop assessment made out of profit driven market process may lead to unrealistic evaluations – the first evaluation of Monte Pashi NPL stock was above 30% of GBV while the last final one is slightly obove 20% what if an amcs would have bought at the initial valuation level?
Third it doesn’t take in due consideration that managing illiquid assets requires operations and even to select outsourcing providers some relevant technical skills are required.
In order to enlarge and develop the secondary market, buyers need to have incentive to invest in local operations (or contracts with local servicers) and this happens if they see relevant potential opportunities to acquire portfolios at prices that allow decent margins.
While change in regulations in order reduce time to recovery is positive a comprehensive long term solutions for NPL problem should include:
- improvement in banks’ credit management capabilities – so that better managed assets with extensive and update data set could be sold at higher prices
- making lending to buyers easier so that financial leverage could help
- level playing field of competition by arranging sale process that matches the very different buyers preferences
GLG – Gerson Lehrman Group – Council Member