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Europe needs AMC to deal with non-performing loans, says EBA

Europe should set up an asset management company (AMC) to handle the trillion euros worth of non-performing loans (NPLs) that are slowing economic growth in the EU, the head of the European Banking Authority (EBA) has said.02 Feb 2017

EBA chairman Andrea Enria told a European Stability Mechanism meeting in Luxembourg that NPLs are expensive to maintain and a misallocation of capital for banks, and that the situation has become "urgent and actionable".

NPLs are worth more than €1 trillion across the EU. Italy has by far the highest number of NPLs, with €276 billion, followed by France, Spain, Greece and the UK, Enria said. Ten countries have an NPL ratio of over 10%.

Banks would like to offload these loans, but there is no proper market for them and prices are generally too low, Enria said.

An AMC could be set up with government support to buy loans based on their "real economic value" rather than their market price, Enria said. The AMC would then have a timeline of, for example, three years within which to sell the loans at their real value – and take the consequences if it fails to do so, he said.

Last year the EBA called for a revival of the EU market for debt securitisation as a way to reduce the ratios of NPLs in the European banking sector.

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.