A potential boom of trading nonperforming German loans (NPLs) portfolios is expected going forward, market sources said. Estimates are that German bank balance sheets could hold an estimated 300 billion (US$361 billion) of NPLs - and it's one of the largest European NPL asset pools that can be securitized. If estimates are accurate, the market can expect a plethora of these loans to hit the scene. German courts can also anticipate a surge of loan enforcement proceedings.

The market has not seen activity on the public front to date, primarily because there was little definition of performance criteria in the past. However, the impending changes made in Basel II should more clearly define how German institutions treat nonperforming loans going forward. "Under German accounting, banks currently treat NPLs as a loan for which specific loan losses are allocated," analysts at the Royal Bank of Scotland explained. "This treatment allows for liberal interpretation, which, given the declining economic climate, may have led certain institutions to encourage understatement, although we believe that many banks are already using the Basel II definition of greater than 90 days past due."

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