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As the COVID-19 pandemic hits all Member States severely, some initial signs are surfacing of what is likely to be a substantial increase in bank non-performing loans (NPLs) in the coming months. Strengthening the tools needed to face the problems caused by NPLs is therefore of foremost importance. This paper argues that asset management companies (AMCs) can be an effective tool in this direction. It further discusses the legal issues related to their implementation, presenting several examples from ...

This document presents summaries of seven external papers commissioned by the European Parliament in November 2020 upon request of the Economic and Monetary Committee (ECON). Papers were delivered, analysed and published in March 2021. ECON has requested its Banking Expert Panel to address the topic of “Non-performing Loans – New Risks and Policies”.

This document presents the summaries of four external papers commissioned by EGOV in November 2020 upon request of the Economic and Monetary Committee (ECON). Papers were delivered, analysed and published in March 2021. ECON has requested its Banking Panel to address the question of when and how to unwind COVID-support measures to the banking system.

Bank loans increased considerably in 2020, due to an unprecedented wave of extraordinary measures aimed at supporting bank borrowers. Where constraints posed by public-sector deficits were tighter, the response was more focused on contingent/fiscally-neutral measures (e.g. public guarantees and moratoria), which might lead to greater unbalances in the future. Post-Covid recovery can be expected to be selective in nature, both across industries and within. Accordingly, emergency measures cannot simply ...

This paper discusses policy implications of a potential surge in NPLs due to COVID-19. The study provides an empirical assessment of potential scenarios and draws lessons from previous crises for effective NPL treatment. The paper highlights the importance of early and realistic assessment of loan losses to avoid adverse incentives for banks. Secondary loan markets would help in this process and further facilitate bank resolution as laid down in the BRRD, which should be uphold even in extreme scenarios ...

The COVID-19 crisis is a significant and exogenous shock to the EU corporate sector, with implications for the operations and funding of many businesses. We compare key indicators for the global financial crisis (GFC) and the current situation, and assess implications for the policy response. We find that while many policy actions taken in response to the GFC remain valid, the nature of COVID-19 suggests a more tailored response is appropriate, with support focused on sectors most directly affected ...

This paper reviews the main differences between the prospects for NPL build-up and resolution between the current pandemic and the financial crisis of 2008-2009. To facilitate NPL reduction following the pandemic, the ECB should actively counter the revealed tendency of banks with low profitability to implement relatively low loan loss provisions.

This in-depth analysis proposes ways to retract from supervisory COVID-19 support measures without perils for financial stability. It simulates the likely impact of the corona crisis on euro area banks’ capital and predicts a significant capital shortfall. We recommend to end accounting practices that conceal loan losses and sustain capital relief measures. Our in-depth analysis also proposes how to address the impending capital shortfall in resolution/liquidation and a supranational recapitalisation ...

Designing exit strategy requires judgment, coordination among different institutions, and graduality. Restoring banks’ balance sheet transparency is a first-order objective. To this end, borrower relief measures should be phased out ahead of the other measures. Relaxation of loan classification and provisioning policies can be lifted in a second stage. The last one to be unwounded would be capital relief initiatives. To provide banks time and space of manoeuvre, exit strategies needs to be communicated ...

In the past decade, asset management companies (AMCs) have been an effective tool for relieving banks of large portfolios of non-performing loans (NPLs). Managed over time, AMCs can reduce the financial burden on the overall system. This paper is based on the existing literature and EU experiences of national AMCs created in the aftermath of the global financial crisis. It discusses the advantages and disadvantages of using AMCs, and considers the key elements in their design.