European Central Bank, (2016), “Addressing market failures in the resolution of nonperforming loans in the euro area”, ECB, 22 November
The high stock of non-performing loans (NPLs) on the balance sheets of euro area banks continues to be an important cause for concern for policymakers. Efforts to resolve this problem have increased significantly in the course of 2016, by supervisors and macroprudential policymakers alike. To relieve capital constraints, these efforts, however, must be complemented with structural reforms to recover the value of NPLs in some countries. Against this background, this special feature focuses on impediments to the functioning of a market for NPL sales. It highlights sources of informational asymmetry and structural inefficiencies. Among indicators of market failure, it distinguishes between supply and demand factors that impede market functioning. In light of the identified externalities, public policy responses are warranted to reduce the cost and duration of debt recovery while also addressing information asymmetries between better-informed banks and potential investors. In certain circumstances the establishment of asset management companies (AMCs) may help to accelerate the value recovery process for banks, while avoiding adverse macroeconomic side effects. Constraints on and limitations of AMCs are also reviewed in this special feature.
Relevant Posts
- Lehmann, Alexander, (2016), “Credit recovery in Spain: NPL resolution was essential, but success depended on broader sector reform”, Bruegel, 21 November
- Demertzis, Maria, (2016), “A framework for thinking about bad loans”, Bruegel, 18 October