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November 27, 2017

ECB published a special feature on overcoming nonperforming loan (NPL) market failures with transaction platforms. This feature is part of the financial stability review of November 2017.

The special feature outlines the desirable features of NPL transaction platforms and discusses their operational implementation. The feature argues that an NPL transaction platform could help overcome the sources of market failure and induce new investors to enter the market. One of the main functions of an NPL transaction platform can be to mitigate the information asymmetry between potential investors and banks willing to sell NPLs. An NPL platform can substantially lower the costs of investor due diligence by standardizing loan data tapes and allowing a wide pool of interested investors to access them. An NPL transaction platform could also play a role in promoting securitization as a tool in NPL resolution and could facilitate divestment by national asset management companies.

Moreover, the EU Council and ESRB have recently stated the potential usefulness of NPL platforms, as they can form part of the comprehensive solution to the euro area NPL problem. The role of the authorities may be limited to the regulatory amendments needed to facilitate the operation of such a platform. Platforms may be potentially useful for a range of asset classes and participation should be open to all interested holders of and investors in NPLs. The feature also highlights that, to realize its full potential benefits, the platform would need to be supported by structural changes aimed at expanding the NPL investor base, such as relaxing licensing requirements and fostering the growth of independent loan servicing.

 

Related Link: Special Feature on NPLs (PDF)

Keywords: Europe, EU, Banking, NPLs, Securitization, Transaction Platforms, ECB

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