EU plans bad Nama-style banks to mop up Covid-hit loans
The EU plans to take over several bad Nama-type banks to take over distressed loans resulting from the pandemic, according to officials with knowledge of the plan.
The European Commission is expected to propose next week the creation of regional asset management agencies to allow banks to pool similar bad debts linked to Covid and sell them in batches to vulture funds.
The Financial Stability, Financial Services and Capital Markets Union branch, where Mairead McGuinness became commissioner in October, presented the plan on Tuesday.
The proposals aim to help small and medium-sized banks get rid of non-performing loans and start financing businesses and households again to support economic recovery, according to a senior EU official.
“The biggest problems are in medium and small banks where the lack of resources makes it difficult to focus on loans and non-performing loans,” the official said.
“It makes sense to collectivize the platforms – they find it difficult to move these loans.”
The plan, however, is unlikely to involve Irish banks, which are used to selling portfolios of large loans to vulture funds and have acquired the capacity to do so independently.
The plan is part of the EU’s efforts to tackle a growing pile of delinquent loans and prevent distressed debt funds from buying them at bargain prices, as they have done in Ireland and elsewhere. other countries after the financial crisis.
The EU is trying to find ways to reach a scale where banks can improve their bargaining power with the big private equity funds and the hedge funds that buy back portfolios of distressed loans at very favorable prices.
Officials fear that an increase in bad loans will mean banks will be sidelined as a tool to fund the post-Covid recovery, “so we have to get it right,” an EU official said.
“There will be no miracle cure,” the official said.
“The solutions are structural in nature to make it easier for banks to sell non-performing loans on their own and perhaps at lower discounts. “
The preferred mechanism for achieving better pricing is to first separate failed assets from otherwise clean lenders, and then aggregate loans of a sufficient scale to sell them effectively.
“Demand is concentrated in a small handful of large specialist funds,” said a European official. “We want to balance the concentration on the asset management side to reduce the discount on the sale.”
Officials mentioned Italy as a particular concern due to its high volume of non-performing loans and its fragmented banking system.
The European Banking Authority (EBA) has created standardized models for loan portfolios – including data such as performance history, loan losses, maturity and year – which is considered a milestone preliminary to the creation of a centralized platform.
Creating a more integrated banking system has been a long-term objective of the Commission which has taken on new urgency since the start of the pandemic. Progress had slowed, but Ms McGuinness pledged to inject new energy into the project.