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    EBA Benchmarks National Insolvency Frameworks Across EU

    November 18, 2020

    EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC. The report presents a unique set of benchmarks, based on loan-by-loan data, showing averages and dispersion of the recovery outcomes across member states. The report discusses characteristics in insolvency regimes across EU that are associated with more efficient outcomes and identifies areas where the divergence in the effectiveness of the national insolvency regimes is widest, by analyzing a number of variables that help to explain the observed differences in the benchmarks.

    EC issued a Call for Advice for EBA in January 2019 for benchmarking of national loan enforcement frameworks across individual EU member states. For the analysis, EBA and the national competent authorities collected loan-by-loan data on loans under insolvency proceedings from more than 160 banks in 27 member states, with the reference date for data being the period before December 2018. The sample of loans under enforcement comprises more than 1.2 million loans and is divided into these asset classes: corporate, small and medium-size enterprises (SMEs), commercial real estate (CRE), residential real estate (RRE), retail credit cards, and retail-other consumer loans. Benchmarks are calculated by asset class for recovery rates (gross and net), time to recovery, and judicial cost to recovery. The data show that collateralized lending, including RRE and CRE, generally present higher recovery rates while retail credit cards generally show the lowest recovery rates, but are characterized by the shortest recovery times. Retail loans, in general (credit cards and other consumer loans), show the highest levels of judicial cost to recovery relative to the size of the receivables. Loans to large corporates always present higher recovery rates than loans to SMEs, whereas the time to recovery tends to be similar for the two loan categories. Loans to SMEs also show one of the highest judicial costs to recovery. 

    The legal system that forms the basis of the enforcement framework is a significant factor explaining the recovery rates and time to recovery. The results indicate that the existence of certain characteristics related to both the legal framework and the judicial capacity are important to improve the recovery outcomes. Positive characteristics of the enforcement frameworks that are common to three or more asset classes are, for example, the legal instruments to enable out-of-court enforcement of collateral available; the possibility for creditors to influence the proceedings through creditor committees; and the existence of triggers for collective insolvency proceedings taking into consideration the debtor's future positive or negative cash flow. Positive characteristics of the judicial capacity that seem important to improve the recovery outcomes include the existence of courts and judges specialized in insolvency cases as well as the possibility of electronic communication between the courts and the insolvency administrators. The report concludes that, at present, there is significant variability across member states in the effectiveness of national insolvency practices as measured by recovery rates, times of recovery, and costs of recovery. It is important that EU banks act proactively and take advantage of the best practices in local insolvency regimes to ensure speedy recoveries and to minimize the risk of accumulating non‐performing loans.

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    Keywords: Europe, EU, Banking, Credit Risk, Benchmarking, CRE, RRE, NPLs, Loan Enforcement Framework, EBA

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