How to Make Your Nonperforming Loans Harmless
THE IMPORTANCE OF IMPROVING THE RECOVERY PROCESS IN A STUDY BY ANDREA RESTIAccording to data collected by the European Bank Authority, the non-performing loans to total loans ratio has decreased in the EU since 2014 by nearly three points. However, some member states such as Italy still report high ratios. What to do? Andrea Resti has studied the issue on behalf of the European Parliament’s Economic and Monetary Affairs Committee. He has pinpointed four main levers that can be used to drive down non-performing loans (NPL).
The first one is the improvement of the recovery process.
“Banks often lack specialized skills and IT infrastructures. Additionally, an independent unit should operate the workout of defaulted exposures”. The second lever is NPL sales. In recent years they have been a substantial volume of sales that allowed Italy to lower its NPL ratio from 16.3% to 9.4%. Sales are not without risks. When large investment funds buy NPL, they look for double-digit rates of return. They therefore buy at low price. The difference between the price and the underlying long-term economic value causes a wealth transfer from the banking system to outside investors.
The third lever is the creation of state supported bad banks that can buy non-performing exposures and wait for a better economic climate to resell them. The fourth lever is the introduction of calendar provisioning: lenders must write down NPL based on a pre-defined schedule. “The idea is to impose on banks a calendar of increasing devaluations that will lead, within a number of years, to total devaluation.
This is what the European Central Bank established, stealing, so to speak, from the European Parliament its law-making role. A similar but less strict rule was later approved by the European Parliament itself. Unfortunately, the rule could act as an incentive to lenders to sell NPL at a price below their long-term economic value”.
​Read more about this topic:
Massimo Marinacci. Understanding Risk in Companies and Our Lives
The Real Trouble Starts When We Think We Can Calculate Everything
Corporate Governance Is not Safe from Black Swans
A Bridge Where Decision Theory Meets Risk Analysis
Policy Makers React to Ambiguity Like Other Humans Do
No Economic System Is Safe. Shocks Travel Quickly and Unexpectedly
When International Trade Increases the Chance of Conflict
With the Monte Carlo simulations, an epochal revolution in the probabilistic risk assessment of business plans has arrived
New Sanitation System Can Half Healthcare Associated Infections and Reduce Related Costs by 75%
by Claudio Todesco
