It's difficult for European banks to sell their non-performing loans using securitizations, and rules should be put in place to make the process more attractive, according to the bloc's top banking regulator.
Under current rules, potential buyers of bundled loans face "very high capital requirements" for owning the assets, the European Banking Authority said in an opinion sent to other policy makers. On top of that, new regulations governing asset-backed securities are causing "compliance challenges" for bad-debt sellers.
The issues result in "higher funding and transaction costs, depress the price of assets, increase the originating institution's losses and make securitizations an unattractive funding tool," the EBA said on Wednesday.
Banks have faced pressure from EU regulators for several years to reduce their piles of non-performing loans. The total stock fell to 636 billion euros ($707 billion) at the end of June from more than one trillion euros in 2016, according to the EBA. But levels remain elevated in some member states, including Greece, Cyprus, Portugal and Italy.
Lenders have several options when it comes to getting rid of soured assets: They can keep them and absorb the loss, package and offer them at a discount or securitize them, where where loans are bundled and sold in tranches with different levels of risk. While the latter is the most costly and complex kind of transaction, it can appeal to a broad range of investors, leading to better prices for sellers, the EBA said.
Italy and Greece have launched programs with government guarantees to promote the market for securitizations of nonperforming loans. UniCredit SpA is currently preparing to sell 6.06 billion euros of soured debt through a securitization. Yet overall, the method "remains small compared to outright portfolio sales," the EBA said.
Any rule changes are unlikely to come quickly, as they would need action from the European Commission and may elicit further debate in the block's parliament and in national governments.
