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EBA calls for revival of debt securitisation market to reduce NPL ratio

The revival of the EU market for debt securitisation could help to reduce too-high ratios of non-performing loans in the European banking sector, the European Banking Authority (EBA) has said.26 Jul 2016

The sector must address backlogs in judicial systems and processes and improve secondary markets to reduce the ratio, the authority said, in a report on trends in asset quality in the sector.

Securitisation typically involves the pooling and repackaging of loans or other assets, such as mortgages, leases or credit card receivables, and the conversion of them into debt securities. The repackaged assets are put together into portfolios and sold to special purpose companies, which fund the acquisition by issuing debt securities to investors.  The investors then receive a cash flow from the underlying assets.

The EBA looked at data on NPLs and forbearance (FBL), where payments have been temporarily postponed, and found that the ratio of NPLs remains too high, it said.

With an average ratio at 5.7% in March 2016, NPLs in the EU remain up to three times higher than other global jurisdictions, the EBA said.

Capital strengthening in the sector and asset quality reviews since 2014 have helped to identify and reduce NPL ratios, "but the overall level of legacy assets remains high, albeit uneven across countries", the EBA said.

The revival of the EU market for debt securitisation "may be a way of widening the range of options that banks could consider for dealing with their NPLs", the EBA said, although it stressed the need for supervisory guidance.

The sector would benefit from a "deep and liquid secondary market in NPLs," the EBA said.

The EBA called on EU countries to support on-going supervisory work that aims to improve arrears management and said that the significant variation in legal systems, the duration of court proceedings and tax regimes across the EU must be addressed.