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27 November 2017

ECB: Overcoming non-performing loan market failures with transaction platforms


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Transaction platforms can help deal with Europe’s high stock of non-performing loans, a special feature of the upcoming Financial Stability Review finds. But this would also require structural changes aimed at expanding the investor base.


The secondary market for NPLs in the euro area currently suffers from several market failures. This results in an oligopsonistic market with a limited number of large buyers. Transaction volumes and prices thus tend to be below what could be expected in a fully competitive market. An NPL transaction platform could alleviate these market failures by standardising and validating loan-level data, reducing due diligence costs and hence increasing the number of potential investors in the market. Further analysis is required to assess the feasibility of the platform concept, especially concerning the impact of data protection and bank secrecy rules.

The EU Council and the ESRB have recently stated the potential usefulness of NPL platforms. They can form part of the comprehensive solution to the euro area NPL problem, complementing other tools such as AMCs and internal workout by banks. Unlike AMCs, they do not require significant financial aid from the state, thus avoiding possible state-aid issues. In fact, the role of the authorities may be limited to the regulatory amendments needed to facilitate the operation of such a platform. Platforms may be potentially useful for a range of asset classes and participation should be open to all interested holders of and investors in NPLs.

To realise its full potential benefits, the platform would need to be supported by structural changes aimed at expanding the NPL investor base, such as relaxing licensing requirements and fostering the growth of independent loan servicing. In some European jurisdictions, the investor concentration is reinforced by licensing and other compliance requirements imposed on prospective NPL investors. The entry of new investors into the NPL market is also further limited by the lack of an efficient third-party servicer market in many EU countries. For servicers, accessing a new market takes time and requires upfront investment, which may become a sunk cost if a successful deal is never concluded. This, in turn, deters smaller NPL investors without country expertise and their own servicing capacity.

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© ECB - European Central Bank


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