The Chair of the single supervisory board within the ECB, Andrea Enria, is convinced that the economic crisis caused by the Covid-19 pandemic — a symmetrical macroeconomic shock external to the European Union — requires “a European initiative” to enable the banking sector to cope with the likely wave of non-performing loans.
Referring to his op-ed published by the Financial Times the day before, on Tuesday 27 October, he detailed the advantages of setting up an asset management company (AMC) at the euro area level before the European Parliament's Economic and Financial Affairs Committee. “Asset management companies (AMC) are a tool that, if well engineered & designed, generally don't produce losses for taxpayers, and they can enable the banking sector to clean the balance sheet in a much faster way”, he said.
Mr Enria is therefore proposing the creation of a European ‘bad bank’ or, failing that, a “European network of AMCs”. It would be available to banks whose business model is deemed to be viable as well as other financial institutions that would be subject to strict conditionality rules, including rules on restructuring.
Whichever solution is chosen, the entity would be backed by a European body in order to finance it on the markets. Mr Enria also emphasised the importance of defining a common valuation methodology for the transfer of non-performing loans from the bank to the AMC. Such a methodology, coupled with a low cost of funding, would make it possible to find “the right balance between the losses imposed on banks upon transfer of the NPLs and the medium-term profitability of the asset relief scheme” for managing bank assets, according to Mr Enria. It would also ensure the fair treatment of banks through a single pricing system that would be developed at European level.
Another advantage, according to the former Chair of the European Banking Authority, is that banks, by benefiting from cleaner balance sheets, would lend greater amounts to the economy, so economic players would be able to invest more instead of trying to reconsolidate their financial position. ‘Bad banks’ may be part of the toolbox for dealing with non-performing loans, but “they are not the magic wand that makes losses disappear”, said Elke König, Chair of the Single Resolution Board, the European agency charged with resolving large failing banks, before the same MEPs somewhat later in the day. She called on banks to act as quickly as possible to identify NPLs and make provision for them.
Within the ECB, the central scenario still points to a recession of 8.7% of GDP within the euro area by 2020. However, given the “uncertainty” linked to the duration of the pandemic, the ECB does not rule out a scenario leading to an explosion in the stock of non-performing loans to the tune of €1,400 billion, a figure well above the level observed after the 2008 financial crisis.
On Tuesday, Mr Enria told MEPs that the current NPL ratio for significant institutions was “2.94% compared with the total outstanding loans in the second quarter of 2020. “However, we do expect a rise in non-performing exposures, particularly once public support measures, such as payment moratoria, expire”, he acknowledged.
Mr Enria also made no secret of the controversial nature of his proposal, because some Member States fear “mutualisation” of potential losses. “This can be achieved without the need to mutualise”, he said. This would be achieved in particular by allocating the losses incurred according to the country of origin of the bank that granted the loan.
The issue of NPL loans is closely monitored at a European level, since it is a condition for the early implementation of the backstop rescue net, the financial arm of the resolution component within the banking union. On Wednesday 4 November, EU Finance Ministers will discuss this issue in order to draw up guidelines for the European Commission, which is preparing a new targeted action plan. (Original version in French by Mathieu Bion)