Why GACs like guarrantee is better than national AMCs

As reported by Reuters

European Union finance ministers on Tuesday called for speedier unloading of bad debt by EU banks and recommended more money be put aside by the banks to protect them from trouble. Vice-President Valdis Dombrovskis told a news conference after the finance ministers agreed a new plan to tackle the problem. (…)

Under the plan, the European Central Bank could force banks to increase their buffers against existing NPLs when it deems they are not sufficient. Banks could also be obliged to automatically set aside more capital for new loans when they expect the level of NPLs to grow beyond acceptable levels.

Improving  the Secondary market

Ministers also stated that secondary markets for NPLs are currently underdeveloped and provide little incentive for banks to unload their bad credit and therefore proposed measures to improve secondary markets for NPLs.

The famous euro sign landmark is seen through the lights of a passing tram outside the former headquarters of the European Central Bank in Frankfurt, Germany

The famous euro sign landmark is seen through the lights of a passing tram outside the former headquarters of the European Central Bank (ECB) in Frankfurt, Germany, January 19, 2016. REUTERS/Kai Pfaffenbach

Ministers hope this could address what they consider a “price problem” since NPL are currently sold at small percentages of their nominal values they hope that a better-functioning market would push up the prices of NPLs.

An earlier plan to set up an EU “bad bank” that could have absorbed big chunks of bad debt at higher prices was dropped, in part because EU states with healthier banks, like Germany, are not keen to use taxpayers’ money to help lenders in the mostly southern European countries where the bad loan problem is worst.

But 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. EU officials said the price of bad loans depends on national conditions and recovery time and can vary widely among countries. The commission will set by the end of the year “asset valuation rules” for AMCs.

AMCs could also be turned into national bad banks that acquire bad loans at prices much closer to their nominal value. But this would constitute state aid and would entail strict conditions, the restructuring of the banks that offloaded the bad loans and losses for banks’ shareholders and junior bondholders, EU officials said.

Ministers also pushed for changes to national insolvency regimes that would speed up the recovery of bad loans from debtors.

(news reported by Francesco Guarascio @fraguarascio in Brussels; additional reporting by Francesco Canepa in Frankfurt)

The question of Local AMCs

As I explained previously I don’t believe national AMCs or local Bad Bank may be a useful tool to improve NPL secondary market because any time I hear about paying price ‘above market level’ there are 2 simple questions coming to my head:

  1. how is market price calculated?
  2. who will fill the GAP?

Using a state guarantee, only in those cases where pure market deals would have unbearable costs is a far more effective strategy: most recent bad banks experience in Italy are not exactly a success with REV Gestione Crediti parking its assets for 2 years, being able to dispose only a small portion of them and then transferring the management to Cerved and doBank in recent days and SGA taking some 20 years to collect former Banco di Napoli’s Bad loans.

Recent Italian experience of GACs Securitizations proves that relevant amount of NPLs can be offloaded from balance sheet at affordable cost without a direct state aid and within a market  framework, so what’s the point of involving state owned entities with the significant risk of mispricing assets? Without the commitment of a private buyer  willing to get back its investment and possibly making some profits, what will prevent poor management of assets and lack of control in recovery cost? And finally who is going to pay for these inefficiencies?
MVHO is that taxpayer’s money is going to fill the GAP and without any market driver this gap could be wider than expected, and this is the reason why (if something has to be done in market that proved to be able to work quite well)  I prefer state guarantees like GACs that are issued at market prices and within securitization schemes with private buyers for mezzanine and junior tranches.


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GLG – Gerson Lehrman Group – Council Member

About Massimo Famularo

Investment Manager and Blogger Focus on Distressed Assets and Non Performing Loans Interested in Politics, Economics,
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