Dealing with NPLs in Europe

Dr. Daniel Ioan Dumitrescu & Dr. Diana Valentina Dumitrescu European Center for Services Investments and Financing ECSIF.EU
Handling NPLs
in a digital environment
The Banking Association for Central and Eastern Europe
35th BACEE Regional Banking Conference
16-17 October 2017
Budapest

NPLs in Europe, Japan and U.S.
990EUR billion in NPLs in
Europe in 2016
The Eurozone had the greatest difﬁculties in liquidating
the large portfolios of non-performing loans.
6,7%
EU GDP

EU Statistics - NPLs
NPLs per country of origin of the bank
CY GR SI PT IT IE BG RO HU HR
49%
47%
20% 19%
17%
15% 14% 14% 14% 13%
0
10
20
30
40
50
NPL for total On-balance loans

In 2016, the weighted average NPL ratio in the
EU and in the euro area (EA) amounted
respectively to 5.1% and 6.4%. In one-third of
EU countries, this gure stands at more than
10%. NPL ratios in Cyprus and Greece amount to
roughly 48% while the NPL ratios for Sweden
and Luxembourg are as low as 1%. Forborne
loans (FBL) ratios show a similar pattern.
EU Statistics

EU Statistics - FBLs
FBLs per country of origin of the bank
CY GR IE SI PT BG RO HU HR IT
27%
20%
14% 13% 12%
9% 8%
6% 5% 5%
0
10
20
30
FBLs for total On-balance loans

NPLs are still a problem because of
Hard economic recovery;
Postponing resolutions;
The legal and judicial system;
Lack of transparency of market for collateral
assets;
Banks may not be suf ciently equipped to
deal with the NPLs;
Underdeveloped secondary markets for
NPLs.

High levels of NPLs have a direct
consequence on the capacity of banks to
support growth. According to the IMF
Article IV review of the Euro area, “high
levels of NPLs and debt have held back
bank lending and investment, limiting
the pass through of easier nancial
conditions".
NPLs effects

The EU guidelines recommend
nancial institutions with a high level
of NPLs to set a clear personalized
strategy in order to reduce it in a
credible, feasible and useful time.
EU Guidelines

Distressed debt market
EU distressed debt markets tend to
be characterized by small trade
volumes, a few investors, and large
bid-ask spreads.

""Lemons"" problem
Banks usually rst sell the really
weak loans (with highest provision
costs) which investors are only
willing to buy at deep discounts. If
banks may wish to sell higher quality
NPLs, investors would have become
used to expect low-quality assets
and would only be willing to pay a
low price, resulting in a large bid-ask
spread.

Banks lack adequate data (both
qualitative and quantitative) for the sold
NPLs. Poor data refers to the terms and
conditions of the NPLs, the borrowers or
the collateral.
Information assymmetries
Buyers may have limited information on
the NPLs portfolio and will be willing to
pay less as they consider potential
restructuring costs and an additional risk
premium.

Increasing
automatisation /
digitalisation
Improving transparency and profitability
Overhead reduction
and staff costs
reduction

Banks need to improve the data quality and to
disclose more information on NPLs to potential
buyers. A gradual development of the
harmonized collection of granular data would
close the gaps in the credit exposure realm and
permit to address monetary and micro/ macro-
prudential issues.
Open Banking through digitalization

EU Initiatives
ANA Credit will set up a standardized dataset
containing detailed information on individual bank
loans in the euro area. ANA Credit stands
for analytical credit datasets.
Information on individual loans to legal entities
(excluding natural persons) on an individual
institution level will be reported from September
2018. An extension of the reporting requirements
to group level and to credits to natural persons
may be included in future stages.

ANA Credit reporting is:
mandatory for credit institutions
in the Eurozone;
voluntary for the other MSs if
adhering to the EU regulation
provision.

ANA Credit Calendar
H1-Publication
of the nal ECB
Regulation
H2- Publication
of the national
implementing
Regulation
Test reporting
is possible for
31 December
2017
Q1 - First reporting of
counterparty reference
data to the ECB
Q2 - First regular reporting
of granular datasets
2016 2017 2018
Further
reporting
requirements
can be
implemented
2019

Advantages of voluntary adherence
Uni ed reporting data sets inside European
nancial groups;
The possibility to settle bigger and more
categorized NPLs portfolios at national or regional
level;
Access to a global range of institutional investors
with bigger power purchase;
Higher purchasing price expectations;
Anticipating the future and obtain a competitive
advantage toward other nancial institutions.

Open Banking Advantages
Engaging in active NPL portfolio sale
strategies through digitalization will
clean up balance sheets and, as loans
are transferred from banks to
investors, will bring in external capital
to support the work out of additional
NPLs.

Open Banking requires
A set of technologies and data standards that can
be used by the different stakeholders;
Security, privacy, and express consent should be at
the center of Open Banking;
Implementation of enhanced disclosures
requirements on asset quality and non-performing
loans to increase transparency on balance sheets
with more granular information, across a broad
spectrum of the banking sector.

2ndChance RegTech solution
Business Analysis - integration
of EU and national regulatory
requirements;
Providing remote experts (PMs
and BAs);
IT Architecture & Development.
The 2ndChance is a REG-TECH solution established by
European Center for Services Investments and
Financing providing full Project Management services
including:

2ndChance Solution is
fully compatible with Ana Credit
Reporting datasets;
can integrate additional data from
other open databases;
compliant open banking secure
access solution.

Dr. Daniel Ioan Dumitrescu &
Dr. Diana Valentina Dumitrescu
of ce@ecsif.eu
www.ecsif.eu
It's time to give digitalisation a chance!

Dealing with NPLs in Europe

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