The Daily Update - ECB / Non-perform loans

Vítor Constâncio, the Vice-President of the ECB, has warned that one of the most pressing issues for the EU banking sector is the nearly EUR1tn of non-performing loans (NPLs) that are still on their balance sheets. Although the ratio of NPL has been declining since its 2013 peak of 8%, it still remains at a stubborn 6%, however there are 6 countries within the EU that have NPL ratios above 10%. Italy alone accounts for 26% of Europe’s NPL’s. Some EUR276bn of Italy’s EUR1.68tn gross loans outstanding are bad.

The problem for countries with high levels of NPL is that there is a strong correlation between high NPL’s and economic performance. Weak GDP and unemployment rates are the two main drivers of NPL’s, which then have a detrimental effect on growth. Countries whose banks have above average levels of NPL see reduced profitability in the banking system, as well as an increase in funding costs and the tying up of capital. All of this has a negative effect on credit supply which then leads to subdued growth.

Vítor Constâncio believes there should be a Europe wide comprehensive strategy that combines a range of suitable tools to deal effectively with the NPL’s problem. One of his ideas is the National asset management companies (AMCs). He thinks this idea looks promising and says ‘National asset management companies (AMCs), if designed correctly, have been successful in relieving banks’ NPL burdens and recovering asset value. A blueprint for national AMCs in the euro area – essentially, a manual for setting up an AMC – would save authorities time and money. In addition to clarifying in detail how AMCs can be made compatible with the EU legal framework, such a blueprint should identify international best practices for key aspects of AMCs such as eligible asset classes, participation requirements, asset valuation, capital and funding structures and governance’.

Apart from AMC’s, he also believes securitisation schemes may also have the potential to kick start a secondary market in NPL’s, however this may mean government intervention to signal the willingness to follow through on reforms to improve asset valuations. To this end NPL trading platforms or clearing houses should be explored to stimulate transaction activity and increase transparency.

Whatever the outcome to these proposals, it is vital that the EU start to look seriously that the NPL problem. The European Commission has recently announced it will put forward suggestions for a coordinated and comprehensive strategy to deal with the problem, including a blueprint for national AMCs. One option the EU does not have is to bury its head in the sand and hope the problem goes away.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.