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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.

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Blog Post

The impact of the crisis on smaller companies and new mechanisms for non-performing loans

The ongoing recession will result in a fresh surge in non-performing loans (NPLs) once payment holidays and moratoria end later this year. NPL investors played a valuable role in tackling the stock of problem loans from the last crisis, but in the aftermath of the current recession more complex financial restructuring will be needed. Governments should facilitate the refinancing of distressed but viable companies, possibly through a special regime for SMEs.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: July 22, 2020
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Boosting the resilience of Europe’s financial system in the coronavirus crisis

Europe has a heavily bank-based financial structure, but bank-based financial structures are associated with higher systemic risk than market-based financial structures. The higher level of systemic risk in Europe suggests caution when pursuing policies that stimulate risk taking and debt creation by banks, especially in the wake of COVID-19. Priority should be given to financial diversification and equity finance.

By: Joost Bats, Aerdt Houben and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: July 17, 2020
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Opinion

The EU’s Opportunity to Turn Its Markets Toward the Future

Meeting the fiscal demands of COVID-19 will require the European Union to borrow on capital markets more than ever, and for European pension funds and households to look more widely for ways to build their nest eggs safely. The EU should take the challenges of the pandemic and Brexit as a chance to get its financial infrastructure house in order.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 16, 2020
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Policy Contribution

Should Denmark and Sweden join the banking Union?

Though outside the euro area, Denmark and Sweden could benefit from joining the European Union’s banking union. It would provide protection in case of any need to resolve at national level a large bank with a Scandinavian footprint, and would mark a choice in favour of more cross-border banking. But joining the banking union would also involve some loss of decision-making power.

By: Dirk Schoenmaker and Svend E. Hougaard Jensen Topic: Finance & Financial Regulation Date: June 24, 2020
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Podcast

Podcast

Rebooting Europe: a framework for post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 15, 2020
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Opinion

Save markets to save the single market

It’s time for the EU to make quick and indispensable progress in forming a capital markets union.

By: Maria Demertzis Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 15, 2020
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Podcast

Podcast

Banks and loan losses in the pandemic turmoil

The current pandemic is shaking the financial system. How can banks react ? Is a consolidation of the financial system in Europe needed in order to respond to this crisis ? Will our economies suffer from this pandemic as much as they did in 2008 ? This week, Giuseppe Porcaro is joined live by Guntram Wolff and Nicolas Véron to discuss banks and loan losses in the pandemic turmoil.

By: The Sound of Economics Topic: Finance & Financial Regulation Date: March 25, 2020
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Past Event

Past Event

The Sound of Economics Live: Banks and Loan Losses in the Pandemic Turmoil

At this online event we will record an episode of the Sound of Economics, Bruegel's podcast series. In this episode, we discuss the implications of the coronavirus crisis on financial stability and credit availability.

Speakers: Giuseppe Porcaro, Nicolas Véron and Guntram B. Wolff Topic: Finance & Financial Regulation Date: March 25, 2020
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Blog Post

Banks in pandemic turmoil

The banking system is critical to society and requires attention and support. In doing so, however, tough love is preferable to complacency.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: March 24, 2020
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External Publication

Analysis of developments in EU capital flows in the global context

This report presents an overview of the recent trends of capital flows, focused especially on the past year. It provides a detailed analysis at the global level and at the European Union level.

By: Grégory Claeys, Maria Demertzis, Marta Domínguez-Jiménez, Konstantinos Efstathiou and Tanja Linta Topic: European Macroeconomics & Governance Date: March 16, 2020
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Podcast

Podcast

Can the European Green Deal kill the single market?

The European Green Deal is one of the landmarks of Ursula von der Leyen's Commission. But, without an ambitious investment behind it, what could be its potential implications for the EU? Could it go as far as to threaten the EU's single market? This week, Renew Europe's vice-president, MEP Luis Garicano, joins Guntram Wolff and Maria Demertzis to discuss not only the European Green Deal but also the EU Budget and the Banking Union. Disclaimer: this episode was recorded on the 20th of February, before Bruegel hosted the event "The Ressurection of the European Banking Union".

By: The Sound of Economics Topic: Energy & Climate Date: February 25, 2020
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Past Event

Past Event

The resurrection of the European Banking Union

At this event, Luis Garicano, member of the European Parliament, presented his two proposals to resurrect the European Banking Union: "a Safe Portfolio" and "a Single Resolution Board +".

Speakers: Tom Dechaene, Luis Garicano, Michala Marcussen and Guntram B. Wolff Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 20, 2020
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