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After ten years of crisis, European banks are far from seeing the end of the tunnel. While US banks have recovered fairly quickly and have reached in 2012-15 a return on equity of 9.3%, European banks are still stuck at a meagre 3.7%, well below their cost of capital (IMF 2016). This gap is explained by two factors: heavy provisions for non-performing loans (NPLs), and high operating costs reflecting overcapacity and inefficiencies in most big countries, including Germany.
A necessary condition is to remove NPLs from banks’ balance sheets. However, the market for bad loans is affected by information asymmetries that create a wedge between the price at which banks are willing to sell and the price offered by specialised investors.
Recently, many regulators have suggested comprehensive plans to address the issue through national schemes of bad banks (Enria 2017, Constâncio 2017).
Based on a recent paper (Bruno et al. 2016), in this column, Marco Onado, Professor at Bocconi University, Milan and former Commissioner of the Italian public authority responsible for regulating the Italian securities market (CONSOB), propose a securitisation scheme that could create an incentive to sell, while reducing the immediate loss to manageable levels.
As in any intervention to solve market failures, public support is needed both for starting the initiative and to help fund the vehicle. Both can be realised in terms compatible with the present European rules that forbid state aid and mandate involving creditors in bank resolutions.
A comprehensive approach to the issue of NPLs in Europe could be a remedy to market inefficiencies and reduce the problem of bad loans to bearable levels.
The advantages are threefold:
The set-up of a European scheme to securitise NPLs should rank high in the agenda of structural reforms that are considered a necessary step for a real European recovery.