The new EBA NPL templates and taxonomy: another step towards European NPL transparency and standardisation
Building on the European Council’s 2017 “Action Plan to Tackle Non-Performing Loans in Europe,” the European Commission (EC) published its strategy in December 2020 to further reduce the stocks of non-performing loans (NPLs) across the European Union and to implement a systemic solution for the sale and disposal of NPL as well as unlikely to pay (UTP) portfolios.
To give Member States and the financial sector early access to the necessary tools to address a rise of NPLs in the EU banking sector, the EC proposed a series of actions with four main goals:
to further develop a secondary market for distressed assets;
to reform the EU’s corporate insolvency and debt recovery legislation;
to support the establishment and cooperation of national asset management companies (AMCs); and
to implement precautionary public support measures, where needed, to ensure the continued funding of the real economy (examples include the GACS in Italy and HAPS in Greece).
European NPL Data Hub key to transparency and risk evaluation
A key component of a well-functioning secondary market for distressed assets would be the establishment of a central electronic NPL data hub (or data repository) at EU level. Such a hub would enhance market transparency and allow for a better exchange of information between all market participants (e.g., sellers, purchasers, or servicers).
In its press release from December 2020, the EC explicitly mentioned European DataWarehouse (EDW) as an option for the establishment of an NPL data hub by leveraging its experience and the lessons learnt from the securitisation market.
Data on NPL portfolios would have to be collected in a uniform and standardised way by leveraging data templates and taxonomies developed by the European Banking Authority (EBA). The templates would provide information about credit exposures in the banking book and allow potential buyers to assess the value of the NPL or UTP portfolios and conduct their due diligence.
In May 2022 the EBA launched a public consultation on the draft Implementing Technical Standards (ITS), specifying details of such data templates. The EBA consultation ends on 31 August 2022, with the templates and taxonomies expected to be finalised by the end of 2022.
Learning from the past to support a healthy secondary market for distressed assets
When considering the current plan for an EU NPL data hub and the proposed EBA data templates alongside the experiences gained by EDW since its inception in 2012 as Europe’s first securitisation repository, there are at least three valuable lessons that can be learnt from the securitisation market.
The opaqueness of the securitisation market before the global financial crisis in 2008/09 was one of the reasons why the crisis had such far reaching and severe consequences. The lesson learnt was that transparency is the cornerstone of investor confidence. And to restore lost confidence, investors required efficient and non-discriminatory access to raw data and all relevant information for their due diligence efforts and risk management based on common templates such as the ones EBA are about to finalise.
Drawing these past experiences, it goes without saying that an EU NPL data hub should provide fast, easy, and non-discriminatory data access to the relevant parties interested in the sale, purchase, or servicing of a portfolio of distressed assets.
Furthermore, the confidentiality and protection of personal data must be central to the establishment of the hub. As such, the provider of the EU NPL data hub should have proven technical and organisational procedures in place to prevent the unintended disclosure of personal data.
Similar to the data templates proposed by the EBA, the ECB (in 2012) and ESMA (in 2019) introduced data templates to collect relevant information about the underlying loan portfolios in a standardised fashion.
The first lesson learnt during the introduction of the ECB data templates in 2012 was that the close cooperation with relevant market participants (e.g., issuers, investors, servicers and rating agencies) in developing the templates led to the wide acceptance of their use.
Secondly, the standardised definitions and data formats of the ECB data templates enabled investors, for the very first time, to compare the performance of securitisations across jurisdictions, vintages, and asset classes.
Of course, the implementation of the templates did not come without challenges, and as the designated European and UK securitisation repository, EDW worked, and continues to work, diligently toward improving data quality.
Similar contribution from market participants during the consultation period will be paramount to the smooth adoption of the NPL templates from 2023 onwards.
Furthermore, the case for a central data repository dispelled the concern that, despite standardisation, different loan-level data formats and different levels of data quality efforts would arise between repositories. Such variations would have hindered further processing and analysis of the data and relevant documentation.
Such streamlined access to NPL data via a centralised data hub will be expected by prospective buys looking to invest in secondary markets and monitor recoveries and other key parameters thereafter.
Taking into account the progress made in restoring confidence in the European securitisation market and the experience gained by EDW during its 10-year service as Europe’s first asset-backed securities data repository, there are many strong arguments for the implementation of an EU NPL data hub and the use of the EBA’s standardised data templates.
Not only would such developments facilitate further development of an efficient primary and secondary market for distressed assets in Europe, but the reduced costs and time in delivering NPL tapes would open the market to new and smaller entrants that heavily rely on external service providers.
Please join our EDW’s webinar on 12 July 2022, ‘Shaping the future of NPL reporting,’ which will feature a keynote presentation from EBA’s Oleg Shmeljov discussing the consultation paper on ITS on NPL transaction data templates. The webinar will also include two panel sessions featuring speakers from the ECB, Debitos, Gómez-Acebo & Pombo, Nomisma, NPL Markets, and Prelios. Click here to register or visit our events page.