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 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
Read article Download PDF More on this topic

Policy Contribution

A better European Union architecture to fight money laundering

A series of banking scandals in multiple EU countries has underlined the shortcomings of Europe's anti-money laundering regime. The impact of these shortcomings has been further underlined by changing geopolitics and by the new reality of European banking union. The imperative of establishing sound supervisory incentives to fight illicit finance effectively demands a stronger EU-level role in anti-money laundering supervision. The authors here detail their plan for a new European unitary architecture, centred on a new European anti-money laundering authority that would work on the basis of deep relationships with national authorities.

By: Joshua Kirschenbaum and Nicolas Véron Topic: European Macroeconomics & Governance Date: October 25, 2018
Read article More on this topic More by this author

Opinion

Global markets’ tepid reaction to China’s new opening

China’s accession to the World Trade Organisation in 2001 was greeted with great fanfare. But near silence has greeted the recent removal by the China Banking and Insurance Regulatory Commission of caps on foreign ownership of Chinese financial institutions. For Beijing, the apparent lack of interest might be an issue of too little, too late.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 11, 2018
Read article Download PDF

Policy Contribution

European Parliament

Excess liquidity and bank lending risks in the euro area

In this Policy Contribution prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue, the authors clarify what excess liquidity is and argue that it is not a good indicator of whether banks’ have more incentives in risk-taking and look at indicators that might signal that bank lending in the euro area creates undue risks.

By: Zsolt Darvas and David Pichler Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: September 26, 2018
Read article More on this topic

Blog Post

The higher yield on Italian government securities could soon be a burden for the real economy

The increase in the spread between Italian (BTP) and German (Bund) government securities is directly an additional burden for Italy public finance, and thus for tax payers. But it could soon also become a burden for the real economy, as the increased yield on Italian government securities could pull up the cost of bank loans for Italian firms, thus imparting a deflationary impact onto the economy.

By: Francesco Papadia and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: September 10, 2018
Read article More on this topic More by this author

Blog Post

Lehman Brothers: 10 Years After

Ten years after the bankruptcy that shook the world, we review economists’ take on the lessons learned from the global financial crisis.

By: Silvia Merler Topic: Finance & Financial Regulation Date: September 10, 2018
Read article Download PDF More on this topic More by this author

Policy Contribution

High public debt in euro-area countries: comparing Belgium and Italy

This Policy Contribution looks at the evolution of public debt in Belgium and Italy since 1990 and uses the debt dynamics equation to explain the contrasting evolution in the two countries in the run-up to the introduction of the euro, during the early years of the euro and since the beginning of the crisis, arguing that the euro could have been used also by Italy to undertake sufficiently large fiscal adjustment.

By: André Sapir Topic: European Macroeconomics & Governance Date: September 6, 2018
Load more posts