EU plans Nama-style bad banks to mop up Covid-stricken loans

Commissioner McGuinness

Jon Ihle

The EU is planning several Nama-style bad banks to take over distressed loans resulting from the pandemic, according to officials with knowledge of the plan.

The European Commission is next week set to propose creating regional asset management agencies to allow banks to pool similar Covid-related bad debts and sell them in packages to vulture funds.

The Directorate-General for Financial Stability, Financial Services and Capital Markets Union, where Mairead McGuinness became Commissioner in October, is presenting the plan on Tuesday.

The proposals are intended to help small and medium-sized banks offload non-performing loans and get back to funding businesses and households to support economic recovery, according to a senior European official.

"The bigger problems are in mid-sized or small banks where the lack of resources makes it difficult to focus on non-performing loans and lending," said the official.

"It makes sense to collectivise platforms - they have trouble moving these loans."

The plan, however, will probably not involve Irish banks, which have a track record of selling large loan books to vulture funds and have built up the capacity to do this independently.

The blueprint is part of efforts by the EU to tackle a growing pile of unpaid loans and to block distressed debt funds from buying them at rock bottom prices, as they did in Ireland and other countries after the financial crisis.

The EU is trying to find ways to achieve scale for banks to improve their negotiating leverage with the big private equity and hedge funds that buy up troubled loan portfolios at deep discounts.

Officials are concerned that a rise in bad loans will mean banks will be sidelined as a tool for funding the post-Covid recovery, 'so we have to do things', said one European official.

"There will be no miracle cure," the official said.

"The solutions are of structural nature to make it easier for banks to sell non-performing loans on their own and perhaps with smaller discounts."

The preferred mechanism for getting better pricing is to first separate dud assets from the otherwise clean lenders and then to package the loans of sufficient scale to sell them efficiently.

"The demand side is concentrated in a small handful of large specialised funds," said a European official. "We want to balance the concentration on the asset management company side to reduce the discount at sale."

Officials mentioned Italy as a particular concern because of its high volume of non-performing loans and its fragmented banking system.

The European Banking Authority (EBA) has been creating standardised templates for loan portfolios - including data such as performance history, loan losses, maturity and vintage - which is seen as a preliminary step for creating a centralised platform.

Creating a more integrated banking system has been a long-term objective of the Commission that has taken on new urgency since the onset of the pandemic. Progress had slowed, but Ms McGuinness has pledged to inject fresh energy into the project.