Download publication

Policy Contribution

Risk reduction through Europe’s distressed debt market

The resolution of non-performing loans (NPLs), a stock of roughly €870 billion in the EU banking industry, is central to the recovery of Europe’s banking sector and the restructuring of the excess debt owed by private sector borrowers. Could the development of distressed debt markets be a new element of capital market deepening in Europe?

By: Date: January 18, 2018 Topic: Finance & Financial Regulation

A version of this Policy Contribution was originally prepared as the in-depth section of Analysis of developments in EU capital flows in the global context, a report by Bruegel for the European Commission. The study is also available on the European Commission’s webpage.

The market for distressed debt will need to play a more prominent role in Europe’s emerging strategy to tackle the legacy of non-performing loans (NPLs). This market could speed up NPL resolution and allow greater flexibility in bank balance sheet management. Investors could contribute crucial skills and possibly capital to the process of workout and restructuring.

The loan sale process potentially suffers from a number of market imperfections which manifest themselves in high valuation gaps, and in the market failing to cover certain asset types.
In Europe, turnover from distressed debt sales remains limited relative to the total stock of €870 billion in non-performing loans, and the additional stock of €1.1 trillion of so-called non-core banking assets, which banks also seek to divest in this market.

There has so far been little market demand for the bulk of unsecured assets among small and medium-sized companies and other corporate borrowers, loans held by smaller banks with their higher NPL ratios, or exposures to larger enterprises that could benefit from comprehensive debt restructuring and additional finance.

Significant further supply might now come into the market as stricter supervisory guidelines are implemented, and as new accounting guidelines force higher provisioning levels. Improved national restructuring and insolvency regimes are beginning to attract a wider range of investors.

An initiative by EU finance ministers to improve transparency around loan quality and foster greater liquidity through transaction platforms might lower transaction-specific fixed costs somewhat. More decisive public support, for instance through asset management companies or in securitisation structures, might be needed.

As a significant share of Europe’s banking assets might move into the hands of little-known investors, some of the benefits of relationship banking could be lost, and the conduct of the loan servicers will come into the focus of regulators.

View comments
Read article Download PDF More on this topic More by this author

External Publication

Taking stock of the Single Resolution Board: Banking union scrutiny

The Single Resolution Board (SRB) has had a somewhat difficult start but has been able to learn and adapt, and has gained stature following its first bank resolution decisions in 2017-18. It must continue to build up its capabilities, even as the European Union’s banking union and its policy regime for unviable banks continue to develop.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: April 18, 2019
Read article More on this topic

Blog Post

The European Union must change its supervisory architecture to fight money laundering

Money laundering scandals at EU banks have become pervasive. The authors here detail the weaknesses the current AML architecture's fundamental weaknesses and propose a new framework.

By: Joshua Kirschenbaum and Nicolas Véron Topic: European Macroeconomics & Governance Date: February 26, 2019
Read article More on this topic

Blog Post

Whose (fiscal) debt is it anyway?

The authors map how much fiscal debt is in the hands of domestic and foreign holders in the euro area. While the market for debt was much more international prior to the crisis, this trend has since been reversed. At the same time, central banks have become important holders of fiscal debt.

By: Maria Demertzis and David Pichler Topic: European Macroeconomics & Governance Date: February 6, 2019
Read article More on this topic More by this author

Blog Post

After the ESM programme: Options for Greek bank restructuring

With the end of the Greece support programme, authorities now have scope to focus on the legacy of NPLs and excess private-sector debt. Two wide-ranging schemes are under discussion. They should be assessed in terms of required state support, likely investor appetite for problematic bank assets, and institutional capacity to manage a complex new organisation tasked with debt restructuring.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: January 29, 2019
Read article Download PDF More on this topic

Policy Contribution

Equity finance and capital market integration in Europe

Facilitating the financing of European companies through external equity is a central ambition of European Union financial regulation, including in the European Commission’s capital markets union agenda. Against this background, the authors examine the present use of external equity by EU companies, the roles of listings on public markets, and the regulatory impediments in national laws. They assess to what extent EU market integration has overcome the crucial obstacle of shallow local capital markets.

By: Inês Goncalves Raposo and Alexander Lehmann Topic: Finance & Financial Regulation Date: January 17, 2019
Read article Download PDF More on this topic

External Publication

Analysis of developments in EU capital flows in the global context

The monitoring and analysis of capital movements is essential for policymakers, given that capital flows can have welfare implications. This report, commissioned by the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union, aims to analyse capital movements in the European Union in a global context.

By: Grégory Claeys, Maria Demertzis, Konstantinos Efstathiou, Inês Goncalves Raposo, Alexander Lehmann and David Pichler Topic: European Macroeconomics & Governance Date: January 17, 2019
Read article More on this topic

Blog Post

Providing funding in resolution: Unfinished business even after Eurogroup agreement on EMU reform

The recent Eurogroup agreement on euro-area reform foresees a greater role for the European Stability Mechanism (ESM) as a backstop to the banking union. This is a welcome step forward but important issues remain. We assess the agreement on how to fund banks after resolution and the best way to organise the fiscal role in liquidity provisioning to banks. We argue that the bank resolution framework will remain incomplete and its gaps could result in important financial instabilities.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 7, 2018
Read article Download PDF

External Publication

European Parliament

How to provide liquidity to banks after resolution in Europe’s banking union

Banks deemed to be failing or likely to fail in the banking union are either put into insolvency/liquidation or enter a resolution scheme to protect the public interest. After resolution but before full market confidence is restored, the liquidity needs of resolved banks might exceed what can be met through regular monetary policy operations or emergency liquidity assistance. All liquidity needs that emerge must be met for resolution to be a success. In the euro area, this can only be done credibly for systemically important banks by the central bank.

By: Maria Demertzis, Inês Goncalves Raposo, Pia Hüttl and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 22, 2018
Read article More on this topic

Blog Post

Could Italian private wealth compensate for flight of foreign bond-holders?

Italy’s deputy prime minister Matteo Salvini is "convinced" that Italians can help out their government, in the face of a widening yield spread between German and Italian government bonds. The authors assess the feasibility of recourse to household wealth in Italy, and estimate the relative importance of foreign debt-holders in the upcoming bond redemptions.

By: Jan Mazza and Silvia Merler Topic: European Macroeconomics & Governance Date: November 19, 2018
Read article More on this topic More by this author

Blog Post

The consequences of Italy’s increasing dependence on domestic debt-holders

Bruegel’s updated data set of sovereign bond holdings illustrates how a rising share of Italian debt is held by domestic investors – a development with particularly significant implications, in the context of the Italian government’s disagreement with the European Commission over spending plans outlined in its draft budget.

By: Jan Mazza Topic: European Macroeconomics & Governance Date: November 6, 2018
Read article Download PDF More on this topic More by this author

External Publication

Euro area reform: An anatomy of the debate

A year ago, a group of 14 French and German economists joined forces with the aim of forging common proposals for euro area reforms. Their report gave rise to a lively discussion among officials and academics. This Policy Insight summarises the group's proposals and also addresses some of the points raised in a subsequent VoxEU.org debate on the topic.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: November 5, 2018
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: How to improve anti-money laundering efforts in Europe

In this episode, Bruegel senior fellow Nicolas Véron joins Sean Gibson to discuss the recent Policy Contribution on how to better the European Union anti-money laundering (AML) regime, a paper he has co-written with Joshua Kirschenbaum.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 30, 2018
Load more posts