Last week the NPL Advisory Panel of the European Commission has published a paper on the role of securitisations in the further development of the secondary market for non-performing loans (NPL) in Europe.
Further developing secondary markets for non-performing loans: the role of securitisation
As part of the NPL Advisory Panel, we are pleased to have contributed to this important review of the European NPL market. The paper is timely as it comes while Greece is considering the extension of their HAPS government guarantee scheme for NPL securitisations. The risks and benefits of Italian GACS transactions are analysed and analysis of projected cash flows for GACS securitisation earlier this year is referenced https://nplmarkets.com/italian-npl-abs-cash-flow-projections/.
The paper explores the role of securitization in contributing to the development of a mature secondary market for non-performing loans. The primary objective is to provide banks with effective tools for addressing NPLs by leveraging secondary markets for distressed debt. These markets allow banks to transfer non-performing assets off their balance sheets, facilitating a reduction in NPLs through sales to third-party investors. An efficient NPL market provides banks with options to prevent significant accumulations of NPLs on their balance sheets, enabling them to focus on lending activities, supporting credit supply to the real economy and thereby contributing to broader financial stability.
The paper emphasizes the significance of securitization within the toolbox for addressing existing and preventing future NPL issues. The regulatory environment at both European and national levels has evolved to support NPL securitization. Amendments to the Securitization Regulation and the Capital Requirements Regulation clarify the regulatory framework, enabling banks to use securitization as a tool to manage NPLs effectively. Government guarantee schemes have played a role in some EU countries, such as Italy and Greece, in developing NPL securitization markets.
While the EU NPL securitization market is considered underdeveloped, the paper suggests its potential growth in the future. State-guaranteed schemes, once instrumental in kick-starting the disposal of NPLs, may become less necessary. Direct sales remain a preferred alternative for banks, but NPL securitization is viewed as a versatile instrument with significant potential, especially when combined with other measures to tackle NPLs.
Looking forward, NPL market securitization is seen as a tool that could help banks deleverage and manage NPLs effectively, particularly in scenarios of accelerating inflation and tightening credit conditions. It is proposed as a complementary strategy to organic workout of distressed loans, with the potential to improve the overall functioning of the NPL secondary market.
