“’Would you mind holding this for me?’ The (increasingly desperate) search for an answer to Europe’s NPL problem”

Finance Watch’s key recommendations:

• The first priority for legislators and supervisory authorities should be to ensure that banks’ loan origination, credit risk management and NPL management processes are adequately reported, regulated and properly supervised.
• In the interest of providing better transparency and as an ‘early warning mechanism’ to flag any build-up of NPLs in specific segments of the economy we would also propose the inclusion of more granular reporting and disclosure on NPLs by banks, e.g. by geography and segment.
• Banks that lack the financial resources to cope with their NPLs without having recourse to public funds should be restructured or resolved under the Bank Recovery and Resolution Directive (BRRD). Existing loopholes, such as the “precautionary recapitalisation” should be closed and the European Commission’s State Aid rules (the “2013 Banking Communication”) properly aligned with the BRRD as a matter of urgency.
• A well-functioning, transparent and professional secondary market for NPLs could be an important part of the solution provided it does not undermine credit standards or lead to aggressive and inappropriate enforcement actions. Harmonised rules for NPL investors and credit servicers should be conducive to this effort.
• High levels of consumer protection in debt collection practices must be included in the proposal. Furthermore, it is critical for the EU to ensure that all Member States introduce debt restructuring procedures (‘second chance’) and insolvency law frameworks that are capable of delivering fair and predictable outcomes within a reasonable period of time, at reasonable cost, while protecting vulnerable debtors, in particular households and small businesses.

Cartoons within the publication:

On the prudential aspect:

On the financial inclusion aspect: