Restructuring non-performing loans for bank recovery: Private workouts and securitisation mechanisms

Resolving regimes of non-performing loans (NPLs) have raised concerns among supervisory authorities and banking regulators. NPLs play a central role in the linkages between poor lending and credit risks. This has implications for the management of asset quality and for the stability of the firm and the financial sector. A high stock of NPLs is undesirable to investors which can lead a decrease in the stock price, profitability loss and potentially to a distressed scenario. In the aftermath of the global crisis, the early resolution of NPLs requires coordinated insolvency proceedings and harmonised restructuring tools. The EU legislation introduced minimum loss coverage layers of capital for NPLs to address newly formed losses. Specifically, the supervisory toolkit implemented in the European Banking Union aims to improve the classification of loan quality and establish common practices to monitor non-performing exposures. This article argues that there is a need to enhance private arrangements within the resolution of deteriorated debts – alternative to public support such as asset management companies and securitisation mechanisms – which in turn would make it more manageable to reduce the NPL on banks’ balance sheet.