Europe’s banking authority proposed creating a new pan-European vehicle to tackle the volume of non-performing loans worth 1.0 trillion euros that hinders economic growth in the region.
At a seminar in Luxembourg organized by the European Stability Mechanism (ESM), the chairman of the European Banking Authority (EBA), Andrea Enria, brought up the possibility of a financial vehicle — a European Asset Management Company, a kind of “bad bank” — that would be called on to manage bad credit.
Financed mainly with private funds, the new company would buy bad loans at market value and sell it for the same.
“If the nominal value isn’t obtained,” said Enria, “the bank will have to take the market price,” with a likely significant loss. It would have to sell the assets in three years. The central banker noted that the difference between the economic value and the market price would have a role in helping the state in a theoretical preemptive recapitalization. If sales don’t materialize, the state would intervene.
The EBA proposal comes as Europe struggles to find an efficient solution to resolve the question of deteriorated credit that weighs on bank balance sheet and economic recovery.
In his presentation yesterday, Enria wanted to emphasize the fact that his proposal doesn’t foresee any pooling of risk because, if a certain operation of acquisition and sale doesn’t succeed, the nation of reference will be the one to recapitalize the bank in question. And shareholders of the bank would take a hit if the value of transferring the bad loans is lower than the book value carried by the bank. During the seminar, the EBA proposal had the support of Klaus Regling, managing director of the ESM (European Stability Mechanism), who, among other things, stressed this point – that there was no pooling of risk. He said that is “politically an advantage” since the issue of financial responsibility is a controversial one.