Portfolio Lead Advisory Services Weekly Digest - Edition 2

In the first edition of this blog series we noted recent reports that the ECB is dusting off previous plans for a EU wide “Bad Bank” to deal with the issue of the expected wave of “coronavirus toxic debt”. This was in response to the concern that up to €500bn of debt could go bad within the Eurosystem, which would weigh heavily on the banking sector and constrain economic recovery.

While not a universal panacea, “Bad Banks” (which could be either at a supra-national, national or individual bank level) can play and historically have played (viz NAMA in Ireland, SAREB in Spain, etc.) an important part in the process, along with:

  • strategic asset quality reviews, to identify NPLs which need restructuring;
  • properly functioning NPL markets to provide institutions the often necessary access to private capital;
  • an appropriate enforcement framework; and
  • bank recapitalisations to shore up bank balance sheets as a result of booked losses.

Whether they are right for now remains to be seen and will depend on how events unfold; we think it is likely that their usage as one measure to support timely NPL resolution will (and should) continue to be examined and debated, as in a recent ECB research piece “COVID-19 and non-performing loans: lessons from past crises”, which looked at 88 past banking crisis to find out the lessons for non-performing loan resolution after COVID-19.

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