The effort of European Banking Authority in order to to promote a secondary market for NPL is remarkable and the recently published standard data templates are definitely a good step in the right direction.
While I did not support the idea of local Asset Management Companies to address the same problem (as previously proposed by EBA), reducing information asymmetry is an obvious way to reduce Bid Ask gap because:
- the more the available data set is complete and updated,
- the lower is the risk premium required in the discount rate,
- the higher is the potential price paid
In order to provide a market perspective two key-point deserve some attention
- in order to finalize a bid buyers also need
- info enrichment like updates on employment status of borrowers
- field checks like recent photos of the collateral assets and updated appraisal on maintenance status
- most recent legal doc like bankruptcy receiver reports, official auction results etc
- collecting and checking the info has non negligible cost that for smaller entities may imply substantial restructuring of internal business processes as well as accounting and IT systems
Trying to figure out how EBA templates can be used in the Italian NPL market we should consider that
- a very limited number of banks (the biggest and the most advanced) is ready to produce the templates without disrupting internal processes
- all the other would be forced to hire external advisers to collect and check the data in order to fill the templates
- since the originators with more problems in collecting data are often those with lower quality portfolio it is questionable if the additional cost of the preliminary due diligence to fill the templates would be compensated or not by the extra price gained providing clearer and more complete data set
In conclusion, supporting the development of a secondary market is a fundamental step on the way to improve soundness in banking sector and finally reduce NPL ratios and gross stocks; in order to realize this goal, setting and a standard framework for data set to be provided by sellers is for sure and helpful tool to reduce information asymmetry.
Furthermore, the attempt to propose a best practice in structure and detail level of data provided by sellers offers a good chance to start a discussion on internal processes to manage data in order to be able to fill the templates and on the credit management process itself since some data can be available (es updates on legal status) only if a proper activity have been performed.
Finally, the above mentioned additional requirements necessary to investors in order to calculate their bid price should also be considered while considering (see chart below) that an appropriate portfolio segmentation in order to match buyers preferences is also a very relevant issue to close the bid ask gap.
GLG – Gerson Lehrman Group – Council Member