Steps toward the implementation of the EU NPL Action Plan
In the context of a post-pandemic recovery, European governments and the European financial system have been preparing for a wave of non-performing loans (NPLs) which are expected to be unveiled once the various COVID-19 support measures are terminated.
In particular, as moratoria and other fiscal stimulus measures are phased out, experts expect to witness a sharp increase in the level of NPLs across the continent. Although many lessons have been learned from the previous crisis, the current scenario presents some distinct characteristics:
- the significant cross-sector differences in the crisis’ impact;
- the generous fiscal support offered to corporates and households; and
- high uncertainty surrounding the lockdown consequences.
As a result, it became of utmost importance to promptly assess and provision for loan losses to avoid adverse incentives for banks. Moreover, fostering secondary loan markets turned into a priority for facilitating bank resolution, as outlined in the recently approved Bank Recovery and Resolution Directive.
Towards the end of 2018 the European Banking Authority (EBA) published its final guidelines on the management of NPLs and forborne exposures, while requiring banks to introduce NPL reduction strategies. These strategies comprise a variety of tools, among which secondary market transactions represent a fundamental piece. As such, EBA aims to support banks’ strategies by revising and improving its templates for non-performing exposures.
EBA NPL Data Templates in Focus
EBA’s data templates were introduced in 2017 with the clear goal of:
- facilitating financial due diligence and NPL transaction valuation,
- reducing information asymmetries and barriers to entry, and
- providing a benchmark for a common data standard which would allow for better comparability across jurisdictions.
However, the non-mandatory character of those templates and their lengthy structure were challenging. The importance of the EBA templates’ objectives has been fully recognized, especially in the context of the post-pandemic end to moratoria.
Consequently, EBA initialised the revision of its NPL data templates and, as a first step, tasked European DataWarehouse with conducting a survey to collect industry feedback on the criticality and availability of specific data fields. A revision of the templates’ structure began shortly thereafter.
EBA Launches NPL Template Discussion Paper
In this context, EBA launched a discussion paper on NPL data templates on the 4th of May 2021 asking for the input of all stakeholders and NPL market participants on the buyer and seller side. This consultation, which closed at the end of August 2021, seeks to make the EBA data templates simpler, more proportionate and effective, as well as more closely aligned with current market practices by the end of 2021. Among the various potential benefits, EBA identifies the consistent price discovery across the European NPL market.
The scope of the templates has also been another major point of discussion, with EBA noting that these templates might become mandatory and be turned into implementing technical standards (ITS). This could occur following the adoption of the proposed Directive on credit servicers, purchasers, and recovery of collateral. Another consultation paper would then be published by EBA.
European Commission Targeted Consultation Underway
EBA’s initiative clearly addresses several different issues by focusing on data reporting and availability. There are, however, other issues which need to be solved in order to plan a comprehensive set of actions to tackle NPL stocks in Europe. For this reason, the European Commission (EC) published a targeted consultation on the 16th of June 2021.
The EC aims at collecting the feedback of stakeholders, in particular those directly or indirectly participating in NPL secondary markets, such as NPL sellers and purchasers, banks, asset management companies, and specialised intermediaries. The scope of the consultation extends to include consumer associations, Member State authorities, EU institutions, as well as academics. This consultation intends to gather information on the remaining obstacles to the proper functioning of secondary NPL markets, along with potential strategies to improve NPL data quality, quantity, and comparability.
Based on the feedback, the EC also plans to decide whether EU coordinated actions and policy measures are fine-tuned in addressing market inefficiencies, information asymmetries, market liquidity, and bid/ask spreads.
The EC’s consultation will run until the 8th of September 2021 with the ultimate goal of ensuring transparency and liquidity whilst allowing for informed trades that would benefit not only banks and investors, but also borrowers.
European NPL Data Hub on the Horizon
At this point, it is clear that data plays a central role in the discussions revolving around improvements to the European NPL framework. In this regard, the EC published a report on its NPL Action Plan on the 16th of December 2020. A dedicated section on data Infrastructure is featured in this report, where the EC expresses its willingness to establish a central data hub at the EU level to collect and store anonymized data on NPL transactions and provide post-trade transaction details and sale prices. In addition to improved market transparency and standardisation, such a solution would allow for a more effective exchange of information between market participants (credit sellers, credit purchasers, credit servicers, asset management companies, and private NPL platforms).
The EC leaves the door open for different alternatives regarding the setup of this data hub based on a public consultation. Nonetheless, based on its proven experience in the securitisation market, it has named European DataWarehouse as the example of a strong solution.
In conclusion, the summer of 2021 can be characterised as a very busy period for the distressed debt market as it proceeds with the implementation of the various building blocks as per the EU Action Plan announced in December 2020.
Our team will be speaking about the NPL topic in further detail at a number of upcoming events, including SCI’s 3rd Annual NPL Securitisation Virtual Seminar, NPL Management Greece conference in Athens, and the NPL Management Europe summit in Madrid.
Additionally, please register for European DataWarehouse’s upcoming webinar, “Reporting for ESG, NPL & Synthetics – The Latest Developments – Featuring Insights from Deloitte.” Click here to register.