COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT The development of secondary markets for non-performing loans by removing undue impediments to loan servicing by third parties and the transfer of loans (Part 1/2) And Accelerated Extrajudicial Collateral Enforcement (Part 2/2) Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on credit servicers, credit purchasers and the recovery of collateral

EN EN
EUROPEAN
COMMISSION
Brussels, 14.3.2018
SWD(2018) 75 final
PART 1/2
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT
The development of secondary markets for non-performing loans by removing undue
impediments to loan servicing by third parties and the transfer of loans (Part 1/2)
And
Accelerated Extrajudicial Collateral Enforcement (Part 2/2)
Accompanying the document
Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL
on credit servicers, credit purchasers and the recovery of collateral
{COM(2018) 135 final} - {SWD(2018) 76 final}
Europaudvalget 2018
KOM (2018) 0135
Offentligt
1
Table of contents
1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT............................................................... 4
2. PROBLEM DEFINITION .................................................................................................................. 12
3. WHY SHOULD THE EU ACT? ........................................................................................................ 26
4. OBJECTIVES: WHAT IS TO BE ACHIEVED? ............................................................................... 29
5. WHAT ARE THE AVAILABLE POLICY OPTIONS? .................................................................... 30
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ........................................................... 43
7. HOW DO THE OPTIONS COMPARE?............................................................................................ 54
8. PREFERRED OPTIONS .................................................................................................................... 58
9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?.................................. 60
LIST OF REFERENCES.............................................................................................................................. 61
ANNEX 1: PROCEDURAL INFORMATION............................................................................................ 65
1. LEAD DG, DECIDE PLANNING/CWP REFERENCES.................................................................. 65
2. ORGANISATION AND TIMING...................................................................................................... 65
3. CONSULTATION OF THE RSB....................................................................................................... 65
4. EVIDENCE, SOURCES AND QUALITY......................................................................................... 66
ANNEX 2: STAKEHOLDER CONSULTATION....................................................................................... 68
CONTEXT ................................................................................................................................................... 68
1. COVERAGE AND REPRESENTATIVENESS OF THE CONSULTATION REPLIES....................... 68
2. THE ROLE OF NPLS AND NPL MARKETS ........................................................................................ 70
3. MEASURES TARGETING NPL INVESTORS...................................................................................... 71
4. THE ECONOMIC FUNCTION OF LOAN SERVICERS....................................................................... 73
5. POLICY MEASURES TARGETING LOAN SERVICERS ................................................................... 74
ANNEX 3: WHO IS AFFECTED AND HOW? .......................................................................................... 76
1. PRACTICAL IMPLICATIONS OF THE INITIATIVE .................................................................... 76
2. SUMMARY OF COSTS AND BENEFITS ....................................................................................... 78
ANNEX 4: ANALYTICAL METHODS ..................................................................................................... 87
1. A STYLISED VIEW ON DEMAND AND SUPPLY OF THE NPL MARKET..................................... 87
2. CROSS COUNTRY ANALYSIS............................................................................................................. 92
3. QUANTIFYING THE IMPACT OF THE DIFFERENT POLICY OPTIONS ON NPL
SECONDARY MARKETS- EXPLANATION AND ASSUMPTIONS............................................ 99
4. TRANSLATING THE SCORES FOR THE ASSESSMENT CRITERIA INTO AN OVERALL
RANKING OF THE POLICY OPTIONS ........................................................................................ 110
ANNEX 5: MARKET OVERVIEW .......................................................................................................... 112
1. NATURE AND SIZE OF THE NPL MARKET.................................................................................... 112
2. NATURE AND SIZE OF THE LOAN SERVICING MARKET .......................................................... 121
ANNEX 6: THE REGULATORY FRAMEWORK OF NPL TRANSFERS AND LOAN
SERVICERS..................................................................................................................................... 133
1. A STOCKTAKE OF RULES IN THE EU MEMBER STATES: RESULTS OF THE
QUESTIONNAIRE TO MEMBER STATES .................................................................................. 133
2
1.1 EXECUTIVE SUMMARY............................................................................................................... 133
1.2 BACKGROUND.................................................................................................................................. 134
1.3. ASSESSMENT OF ANSWERS TO THE QUESTIONNAIRE.......................................................... 135
1.3.1 LOAN SERVICING ACTIVITIES.................................................................................................. 135
2. OBSTACLES FLAGGED IN THE PUBLIC CONSULTATION ......................................................... 142
3
Glossary
Term or acronym Meaning or definition
AECE Accelerated Extrajudicial Collateral Enforcement
AMC Asset management company
CEEC Central and Eastern European Countries
CMU Capital Markets Union
distressed debt Debt securities, bank debt, trade claims or other financial securities
(CDS, options, etc.) of companies under financial stress
EBA European Banking Authority
EBITDA Earnings before interest, taxes, depreciation, and amortisation
ECB European Central Bank
ECOFIN Economic and Financial Affairs Council
ESRB European Systemic Risk Board
EUR Euro
FED Federal Reserve Board (US central bank)
GDPR General Data Protection Regulation
HQ headquarter
IMF International Monetary Fund
loan loss provisioning amount expense set aside as an allowance for a loan becoming non-
performing
loan servicer firm specialised in the administration of a loan to ensure the
collection of debt
MS Member State, Member States
NBER National Bureau of Economic Research
NPL Non-performing loan. Bank loans past due 90 days without the
borrower paying the agreed instalments or interest
SMEs Small and medium-sized enterprises
SPV Special Purpose Vehicle: structure used to securitise assets
SSM Single Supervisory Mechanism
4
1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT
1.1. The need to address Non-performing Loans in the EU
Following the financial crisis, the regulatory framework for banks has changed substantially.
The European Union has taken the lead in implementing reforms agreed globally at the level
of the G20 and in the Basel Committee with the objective of reducing risk in the banking
sector, reinforcing financial stability and avoiding that taxpayers have to contribute
financially to the costs of failing banks. In addition to these measures, the institutional
arrangements for the supervision and resolution of banks in the EU have been strengthened
fundamentally with the establishment of the first two pillars of the Banking Union (BU): the
Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).1
As a
result of these measures, the EU banking sector is in a much better shape today than in
previous years.
Nevertheless, several challenges remain to be addressed, including how to decisively address
the high stocks of non-performing loans (NPLs) and other non-performing exposures
(NPEs)2
. NPLs have piled up in parts of the EU banking sector in the aftermath of the
financial and sovereign crises and ensuing recessions. High levels of NPLs in parts of the
banking sector pose significant risks to financial stability and the overall economy in the EU,
unlike in other major economies such as the United States or Japan which have previously
taken a number of actions to reduce the level of NPLs and repair banks’ balance sheets.3
High NPL ratios4
can weigh on a bank's short- and longer-term performance through two
main channels. First, NPLs generate less income than performing loans – thus reducing bank
profitability – and may cause losses that diminish the bank's capital. In the most severe cases,
these effects can put in question the viability of a bank with potential implications for
financial stability. Second, NPLs tie up significant amounts of a bank's resources, both human
and financial.5
Banks saddled with high levels of NPEs have therefore only a limited capacity
to provide new credit to viable businesses. Small and medium-sized enterprises (SMEs) are
particularly affected by the reduced credit supply, as they rely on bank lending to a much
greater extent than larger companies, thereby affecting economic growth and job creation.6
1
The third pillar of the Banking Union, the European Deposit Insurance Scheme (EDIS), was proposed
by the Commission in November 2015.
2
NPEs include non-performing loans (NPLs), non-performing debt securities and nonperforming off-
balance-sheet items. NPLs, which term is well established and commonly used in the policy discussion,
represent the largest share of NPEs. Throughout this document the term NPL is meant in a broad sense
equivalent to NPE, and hence the two terms are used interchangeably.
3
See, for example, FSC (2017) "Report of the FSC Subgroup on Non-Performing Loans"; FSI (2017)
"Resolution of non-performing loans – policy options"; and IMF (2015) "Global Financial Stability
Report, Chapter 1: Enhancing policy traction and reducing risks".
4
The term NPL ratio refers to the ratio of non-performing loans to total outstanding loans.
5
A large portion of the employees' time is spent dealing with lengthy procedures required to manage
NPLs. As NPLs are considered riskier than performing loans, they may require higher amounts of
regulatory capital if left un-provisioned.
6 Simulations by the IMF (2015b) suggest that a reduction of European Non Performing Loans to the
historical average ratio (by selling them at net book value i.e. after provisioning) could increase bank
capital by EUR 54 billion. This would under some assumptions enable EUR 553 billion in new lending.
5
For all these reasons, the Commission has for a long time highlighted the urgency of taking
the necessary measures to address the risks related to NPLs.
While tackling NPLs is primarily the responsibility of national authorities7
, there is also a
clear EU dimension of the NPLs issue. Given the high level of economic and financial
integration in the EU, and especially within the euro area (EA), there are important potential
spill-over effects from Member States with high levels of NPLs to the economies of other
Member States and the EU at large, both in terms of economic growth and financial stability.8
Weak growth in some Member States due to elevated NPL levels might affect economic
growth elsewhere. Also, weak balance sheets of just a few banks can negatively affect
investors' general perception of the value and soundness of other EU banks. This can
unnecessarily raise the funding costs for the sector as a whole, which may adversely affect the
cost of credit to borrowers.
Addressing high stocks of NPLs and their possible future accumulation is therefore essential
for restoring the competitiveness of the banking sector, preserving financial stability and
supporting lending to create jobs and growth. This analysis is shared by a number of reports
from European institutions, international organisations, and think tanks.9
1.2 Recent evolution of NPLs
The general improvement in NPL ratios over recent years continued in 2017, as did the
quality of banks’ loans portfolios. The latest figures confirm the downward trend of the NPL
ratio, which declined to 4.6% (Q2 2017), down by roughly 1 percentage point (pp) year-on-
year (see Figure 1). This reduction was mainly the result of one‐off events that impacted all
bank‐size classes, in particular smaller banks. However, the ratio remains elevated when
compared to historical norms and to other regions10
and the total volume of NPLs across the
EU is still at the level of EUR 950 billion.11
The situation differs significantly across Member States (see Figure 2). Several countries still
have high NPL ratios (9 had ratios above 10% in the second quarter of 2017), while others
have rather low ratios (10 Member States were below 3%).
There is evidence of some progress in reducing NPL ratios in the most affected countries,
owing to a combination of policy actions and a stronger macroeconomic environment.
However, significant risks to economic growth and financial stability remain and progress is
still slow, especially where it is needed the most. Structural impediments continue to hamper
a faster fall in NPL stocks. Provisioning is often still too slow and insufficient to allow for
effectively resolving and preventing any critical accumulation of NPLs in the future. Among
other elements, activity on secondary markets for NPLs is also not yet sufficient to
7
As also underlined in the European Semester recommendations to relevant Member States.
8
See ESRB (2017) and IMF (2015).
9
See ECB (2016, 2017), EBA (2017), FSC (2017), ESRB (2017), IMF (2015a, b), Vienna Initiative
(2012), Baudino and Yun (2017), Bruegel (2017), Barba Navaretti et al. (2017).
10
The NPL ratio for both the United States and Japan was around 1.5 % in December 2016.
11
Source: ECB.
6
substantially contribute to NPL reduction efforts, notwithstanding the increased interest from
certain investor groups and the increasing volume of NPL-related transactions.
Figure 1 EU Non-Performing Loans ratio Figure 2: NPL ratio in EU Member States
3.5
4.5
5.5
6.5
2014-Q4 2015-Q2 2015-Q4 2016-Q2 2016-Q4 2017-Q2
European Union
Source: European Central Bank
Gross non-performing loans and advances
(in % of total gross loans and advances, end-of-period values)
Source: ECB. Note: Dec-2014 not available for CZ.
1.3 Towards a comprehensive package of measures to address NPLs
A comprehensive and credible strategy to address NPLs is an essential and urgent step
towards restoring the viability of – and hence investor confidence in – the EU banking sector.
Pursuing a comprehensive strategy and taking determined action to address NPLs is also
essential for the smooth functioning of the Banking Union and the Capital Markets Union
(CMU) and for a stable and integrated financial system. In this way, the resilience of the
Economic and Monetary Union to adverse shocks will be enhanced by facilitating private
risk-sharing across borders, while at the same time reducing the need for public risk-sharing.
Integrating national and EU-level efforts is needed to address the NPL problem, both on the
existing NPL stocks and on future NPL flows. Reflecting the EU dimension and building on
previous work by the Commission and other competent EU authorities, the Council adopted
in July 2017 an Action Plan To Tackle Non-Performing Loans in Europe.12
It recognises that
work in this area must be based on a comprehensive approach combining a mix of
complementary policy actions, since the complexity of the problem simply does not lend itself
to a single ‘silver bullet’ solution.
The Council Action Plan combines various measures by national governments, bank
supervisors and EU institutions that improve the tools and incentives for banks to pro-actively
address NPLs either by internal work-out or through disposal. In practice, this means
enhancing legal frameworks relevant for both the prevention and resolution of NPLs,
including the functioning of secondary markets. However, other measures such as improving
12
See http://www.consilium.europa.eu/en/press/press-releases/2017/07/11/conclusions-non-performing-
loans/
0
10
20
30
40
50
AT
BE
BG
CY
CZ
DE
DK
EE
ES
FI
FR
UK
EL
HR
HU
IE
IT
LT
LU
LV
MT
NL
PL
PT
RO
SE
SI
SK
%
Dec-14
Jun-17
7
the availability and quality of data on NPLs or improving the market infrastructure (eg. set-up
of trading or information platforms) are equally important. If the right pre-conditions are
present, tools such as Asset Management Companies are also an efficient way to allow
resolution of NPLs while removing NPLs from the banking system in the short term.
The Commission has committed to delivering on the parts of the NPL Action Plan within its
remit. Accordingly, the Commission announced in its October 2017 Communication on
completing Banking Union a comprehensive package for tackling high NPL ratios, to be put
forward by Spring 2018.13
This "Spring package" consists of the following measures:
 A Blueprint for how national Asset Management Companies (AMCs) can be set up in
compliance with existing EU banking and State aid rules by building on best practices
learned from past experiences in Member States.
 A legislative initiative to further develop secondary markets for NPLs, especially with
the aim of removing undue impediments to loan servicing by third parties and to the
transfer of loans to third parties.
 A legislative initiative to enhance the protection of secured creditors by allowing them
more efficient methods of value recovery from secured loans through Accelerated
Extrajudicial Collateral Enforcement (AECE). This refers to an expedited and efficient
out-of-court enforcement mechanism which enables secured creditors (banks) in all
Member States to recover value from collateral granted by companies and
entrepreneurs to secure loans.14
 A legislative initiative amending the Capital Requirement Regulation (CRR), with
regard to the introduction of minimum coverage requirements for incurred and
expected losses on future NPLs arising from newly originated loans, in order to
backstop potential under-provisioning of future NPLs and prevent their build-up on
banks’ balance sheets.
 A way forward to foster the transparency on NPLs in Europe by improving the data
availability and comparability as regards NPLs, and potentially supporting the
development by market participants of NPL information platforms or credit registers.
15
13
COM(2017) 592 final, 11.10.2017, available at: http://ec.europa.eu/finance/docs/law/171011-
communication-banking-union_en.pdf.
14
This initiative will remain consistent with and complementary to the Commission proposal of
November 2016 for a Directive on, inter alia, preventive restructuring frameworks and would not
require harmonisation of actual insolvency provisions.
15
In addition, the Commission is also undertaking a benchmarking exercise of loan enforcement regimes
to establish a reliable picture of the delays and value-recovery banks experience when faced with
borrowers' defaults, and invites close cooperation from Member States and supervisors to develop a
sound and significant benchmarking methodology. In this context, the 2016 Commission proposal for a
Directive on business insolvency, restructuring and second chance lays down obligations on Member
States to collect comparable data on insolvency and restructuring proceedings.
8
The Council Action plan initiatives under the responsibility of other EU institutions and
competent authorities include, among others:
 General guidelines on NPL management applicable to all EU banks;
 Detailed guidelines on banks' loan origination, monitoring and internal governance,
addressing in particular transparency and borrower affordability assessment;
 Macro-prudential approaches to prevent the emergence of system-wide NPL problems,
taking into account potential pro-cyclicality and financial stability implications of NPL
policy measures;
 Enhanced disclosure requirements on banks' asset quality and non-performing loans.
1.4 Commonalities and interdependencies of the various measures
The legislative and non-legislative initiatives of the Council Action plan are interlinked and
mutually reinforcing. They should create the appropriate environment for dealing with NPLs
on banks' balance sheets. Some of them have an impact on the reduction of the current stock
of NPLs, and all are relevant for reducing risks of future NPL accumulation. Their impact is
expected to be different across Member States and affected institutions. Some will have a
stronger impact on banks' ex ante risk assessment at loan origination, some will foster swift
recognition and better management of NPLs, and others will enhance the market value of such
NPLs.
The Commission's three legislative initiatives, namely i) statutory prudential backstops for
loan loss coverage; ii) the development of secondary markets for NPLs, and iii) accelerated
extrajudicial collateral enforcement mechanisms, mutually reinforce each other and also
interact with the other measures of the Council Action Plan. For example, the prudential
backstops initiative ensures that credit losses on future NPLs are sufficiently covered, making
their resolution and/or disposal easier. These effects would be complemented by better
developed secondary markets for NPLs as these would make demand for NPLs more
competitive and raise their market value. Furthermore, accelerated collateral enforcement as a
swift mechanism for recovery of collateral value would reduce the costs for resolving NPLs.
These interactions are described in greater detail in the below box.
9
Figure 3 Commission's policy initiatives within the NPL Action Plan
Box on the reinforcement effects between the Commission's legislative initiatives
This box assesses the possible reinforcement effects between the three initiatives of the Spring
package, namely i) statutory prudential backstops for loan loss coverage; ii) development of secondary
markets for NPLs, and iii) accelerated extrajudicial collateral enforcement mechanisms. As is the usual
practice, each individual impact assessment gauges the incremental effects of the proposed measure
against a no policy change baseline. The underlying idea of the NPL package is, however, that the
effects of each initiative will be mutually enhancing. The exact quantification of these feedback effects
is a quite complex exercise as it is subject to strong modelling uncertainty. This box hence provides a
qualitative description of the feedback channels and their relative strength.
Statutory prudential
backstops
Banks' immediate
recognition of NPLs
Market access to NPL
investors and loan servicers
Higher recovery value of
NPLs
Bank supervision
Better risk assessment in
lending decisions Reform of debt
restructuring and recovery,
insolvency frameworks
Enabling secondary
markets for NPLs
Data standardization and
transaction platforms
Asset management
companies
Powers of bank supervisors
Collateral enforcement
Insolvency reform and loan
enforcement
10
Figure 4 - The reinforcement effects between the initiatives of the NPL package
Effects of Accelerated extrajudicial collateral enforcement (AECE) on other initiatives
As AECE becomes more popular and used by credit institutions, the statutory prudential backstop
measures would be less binding. Indeed, banks would tend to restructure, recover or dispose of their
NPLs earlier and at a higher rate. They would be less affected by the need to increase provisioning as
time goes by, as required by the prudential backstops measures.
Given that the AECE feature would follow the NPLs following their disposal to a third party, this
would help the development of the secondary market by increasing investor participation and thereby
its liquidity (NPL demand-side effects). In particular, shorter time of resolution and increased
recovery, as expected with AECE, would increase the bid prices. Moreover, the harmonization
achieved by AECE would foster development of pan-European NPL investors, further improving
market liquidity.
Effects of Statutory prudential backstops on other initiatives
The more costly in terms of higher provisioning it becomes for banks to keep secured corporate NPLs
on their balance sheets due to the new prudential backstop rules, the higher the incentives for banks to
restructure, recover or dispose of NPLs quicker and earlier, and hence the higher the use of AECE
directly (by triggering it) or indirectly (by disposing of the NPL to a third party).
Holding NPLs on the balance sheet will become costly over time, providing an incentive for banks to
dispose of NPLs on the secondary markets at an early stage, when the backstops require less minimum
coverage. Once the minimum coverage level required by the backstops becomes more binding, the
carrying book value of NPLs will be reduced. Both of these mechanisms would ensure more sellers
participation on the secondary market (NPL supply-side effect), thereby reducing the ask price of
NPLs.
Effects of the development of secondary markets for NPLs on other initiatives
11
Improved investor participation and better functioning of secondary markets would reduce the bid-ask
spread and increase the volume of NPLs that are transferred to third parties. Banks would dispose of
NPLs more eagerly and at an earlier stage, therefore the provisioning backstop would be less often
binding.
With a more liquid and better functioning secondary market for NPLs where investors show appetite
for NPLs with the AECE feature, there would be additional incentives for credit institutions to use
AECE at origination of new loans. This indirect feedback effect would become active once sellers
realise that it is easier to dispose of NPLs having the AECE feature to third party investors.
The effectiveness of the three aforementioned legislative measures would increase if banks
are adequately capitalised in the future. Better capitalised banks will be more eager to sell
NPLs in the secondary market or to realise the collateral of a non-performing loan in a timely
fashion. Furthermore, statutory minimum coverage requirements would provide strong
incentives for banks' management to prevent the accumulation of future NPLs through better
NPL management and stronger loan origination practices. This will reinforce the expected
effects of the EBA’s and ECB’s work on banks' loan origination, NPL management,
monitoring and internal governance practices. Work on NPL information and market
infrastructure would further enhance the functioning of NPLs secondary markets. Lastly,
measures related to loan enforcement would complement the Commission's November 2016
proposal for a Directive on business insolvency, preventive restructuring and second chance,
by increasing the chances that viable businesses survive while non-viable activities are swiftly
resolved.16
1.5 The scope of the impact assessment
The initiative to develop secondary markets for NPLs discussed in this text focuses on a
specific issue that is not taken up in any of the other policy measures in the Action Plan,
namely to remove impediments to transfers of NPLs from banks to other entities and to
simplify and harmonise requirements for loan servicers. Being one of the four key areas in the
Action Plan, stakeholders signalled the importance of secondary markets for the resolution of
NPLs in the public consultation that preceded this impact assessment (see Annex 2) as did
banks contributing to the EBA Risk Assessment Questionnaire. In the latter, they considered
the lack of secondary markets for NPLs one of the two most important impediments to the
resolution of NPLs.17
The initiative analysed here is unique among all measures following the Council Action Plan
as it is the only legislative measure that targets an increase in demand and to raise competitive
pressure on the demand side of the NPL market. Most other measures in the NPL Action Plan
will also have an impact on NPL secondary markets. The introduction of prudential backstops
would increase banks' incentive to sell NPLs. The establishment of AMCs has been
historically one of the driving forces kick-starting secondary markets of NPLs, bringing in
16
COM(2016) 723 final.
17
In EBA’s September 2017 questionnaire, banks indicated both the lack of a market for transactions in
NPLs and the length and costs of judiciary process as the most important impediment (agreement of
about 55%, Question 26 for banks).
12
economies of scale, advantages of specialisation and improved pool valuation.18
Functioning
AMCs can thereby help to both expand and to smooth the supply side of the NPL market.
Data standardisation and transaction platforms improve the matching process of demand for
and supply of NPLs. Measures to improve insolvency and enforcement would increase the
recovery value of NPL, increasing the value for both demand and supply side. Annex 4.1
describes how the different initiatives set up in the Council Action Plan should impact on
prices and traded volumes by depicting a stylised view on demand and supply conditions on
the secondary market for NPLs.
Figure 5: Loan transactions and NPLs across selected EU Member States
a: Volumes in billion EUR b: in % of loans and NPLs
Source : COM calculations with data from EBA and various consultancies (see Annex 4.2).
Since most other measures of the NPL Action Plan will also have an impact on the secondary
market for NPL loans, the ultimate impact of this work stream depends also on the success of
the other measures in the NPL Action Plan. At the same time, the effectiveness of other
policies is questioned without a functioning secondary market for NPLs. Especially the
benefits of AMC and supervisory action could become fruitless if demand for NPLs is
missing.
2. PROBLEM DEFINITION
The consequence of missing or underdeveloped secondary markets for NPLs is that banks
with high NPLs have limited scope to sell them to non-banks or only at high transaction costs
leading to low prices. This holds in particular for smaller banks, which may have high NPL
ratios and a strong incentive to sell, but find that search and transaction costs are over-
proportionally high for smaller portfolios.19
The prospect of low prices on loan sales means
banks may realise losses, which erodes their capital base and therefore represents a
disincentive to sell.20
If NPLs cannot to be disposed, they stay on banks' balance sheets and require provisioning,
which reduces banks' profitability and business opportunities. NPLs also generate uncertainty
about asset quality, which decreases investors' demand and increases banks' capital costs. The
overall result of both effects is reduced credit supply and higher lending rates, which tend to
18
See IMF (2015a).
19
See ESRB (2017).
20
See FSC (2017).
13
disproportionately affect lending to SMEs.21
High NPLs bind bank operating resources and
potentially prevent banks from carrying out more productive uses.22
This effect is particularly
material in smaller banks having less specialised staff. Moreover, the difficulty to assess the
value of a bank which has a large stock of NPL on its balance sheet holds back merger and
acquisition activity in the EU banking sector, often described as oversized.23
Finally, a higher
stock of NPLs on banks' balance sheets as consequence of a lack of secondary markets for
NPL would mean that banks' are more exposed to financial turmoil, i.e. the risk of financial
instability is higher.
2.1 What is the problem?
Despite some momentum in recent years, secondary markets for non-performing loans hardly
exist in Europe. According to the SSM, euro-area Member States do not have a developed
NPL market except Spain and Ireland, whose state of development is characterised as
medium.24
Also outside the euro area, markets are small and underdeveloped in most EU
Member States except in the UK. While a genuine single market for NPLs in the EU would be
difficult to realise in view of considerable cross-country differences in other relevant areas, in
particular insolvency law, investors have been looking for opportunities beyond borders, i.e.
some of those active first in the UK and Ireland and then in Spain, have entered the market in
Italy or several CEECs.
Markets tend to be characterised by comparatively small trade volumes, a few large
transactions involving a limited number of active investors, large bid-ask spreads when
counterparts enter negotiations and a lack of transparency on market prices.25
At the same
time, Member States with higher loan sales recorded a stronger decline in their banks' NPL
ratios (see Figure 10 and Figure 11), suggesting that secondary markets for NPL are
contributing importantly to reduce NPL ratios.
Apart from data of NPLs on banks’ balance sheets recorded by banking supervisors and
central banks, which represent the potential supply of NPL, there are no official statistics to
track NPL markets. Banks are not obliged to reveal them to statistical offices and often have
no incentive to disclose details. Some consultancies collect data of individual sales from
various sources and publish their information in reports. This data is used in this Impact
Assessment. Information about realised market prices is generally not available, but treated as
confidential by the parties involved in the transaction. See Annex 4.2 for a discussion of data
availability and quality and Box 1 in Annex 5.1 for a review of issues with the data on loan
sale volumes.
21
See IMF (2015) and the references to empirical papers quoted therein. See also ESRB (2017).
22
ESRB (2017) argues that bankers have a comparative advantage in borrower relations and customer
service, but not necessarily with respect to NPL resolution. Private equity and asset management firms
can specialise in the operational and/or financial restructuring of viable borrowers and the maximisation
of collateral value collection.
23
For a review of the channels through which NPLs impair merger and acquisitions activity, see the
special feature in the ECB (2017b).
24
See SSM (2017), Table 13.
25
See FSC (2017), Chapters 4.2.3 and 8. See also Bruegel (2017).
14
Major consultancies point to less than EUR 120 billion of transactions in debt sales in 2016 in
the EU, which corresponds to estimated EUR 100 billion NPLs sold.26
The market overview
in Annex 5.1 documents that the secondary NPL market is concentrated in the EU, with a
strong clustering in four countries (ES, IE, IT and the UK) and dominance of large buyers
(23% market share of the top five buyers, largely US or UK domiciled, over the last 2½
years).27
According to market sources, prices depend strongly on the characteristics of the
underlying loans, varying from 5-10% of face value for unsecured consumer loans to 50-60%
for secured (mortgage) loans.28
Annex 5.1 reviews the existing data on market structures.
This apparent malfunctioning of the market is driven by problems of incentives for engaging
in transactions and sufficient information about possible transactions that banks as sellers of
NPLs and non-banks as potential buyers face. Information problem occur on both sides
because the value of an NPL is difficult to establish given its dependence on the likelihood
and amount borrowers will pay back, the value of any underlying collateral and the time and
effectiveness of legal or out-of-court enforcement.29
They lead to high transaction costs. This
is visible in a high gap between prices offered and bid for NPLs, entailing disincentives for
banks to sell as well as limited participation of potential investors. NPLs are not an
established asset class investment funds traditionally focus on, implying that precedent their
involvement they need to set up a new strategic orientation and investment mandates. A
particular factor that can discourage NPL investors to enter the market is the difficulty to
access third-party loan servicers. Loan servicers have been virtually absent in most EU
Member States until recently. Their activity is segmented by country due to local regulations,
which prevents them from realising scale economies.
Incentive problems give rise to market failures leading to high transaction costs
On both market sides, there are underlying incentive problems that lead to a wide bid-ask
spread.30
Buyers assume, and therefore discount, the sellers' incentive to overrate the quality
of the product.31
Buyers have less information about the quality of the asset than the sellers.
Exposure to such information disadvantage about the quality of the asset will be reflected in a
risk premium that reduces the bid price of the prospective buyer. At the same time, the selling
banks anticipate that the potential acquirer assumes that the bank is under pressure to divest
the NPL portfolio. Otherwise it would keep it on its balance sheet and take the losses. In this
26
Loan sales are measured in gross book value of the loans, usually equal to the unpaid primary balance
that the debtor owes to the creditor. EU transactions in 2016 were 118 billion in PWC Portfolio
Advisory Group (Market update 2016Q4), EUR 108 billion in Deloitte (2017), EUR 110.5 billion by
KPMG European transactions dashboard. The share of NPLs in loan sales is estimated at about 70-80%.
See Annex 5.1
27
See Bruegel (2017).
28
See AFME (2017), quoting PWC data.
29
Potential buyers may anticipate that if banks have an opportunity to sell loans, they have a reduce
incentives to adequately screen (prior to credit origination) and monitor (after credit origination) their
borrowers.
30
A high bid-ask spread was frequently mentioned in the public consultation and is a prominent feature in
the literature. See for example FSC (2017), ESRB (2017) and Bruegel (2017). EY (2017) estimated the
bid-ask gap to be 20% for secured Italian NPLs.
31
For an application of the lemon problem on NPL, see ECB (2016) and ESRB (2017).
15
strategic setting, banks have an interest to demand a higher price than justified by the true
value of the NPL portfolio whereas investors have an incentive to understate their
preparedness to pay.32
Negotiation about the purchase of an NPL entails significant transaction costs to agree on a
price and other contractual terms, in addition to the information costs the buyer has to carry to
evaluate the NPL portfolio. The difficulty in closing the gap between bid and offered prices
and arriving on an agreed price between supplier and buyer leads to a long negotiation period
and often prevents that deals are concluded. The available data reported in Figure 6 reveals
that about a quarter of the loan sales transactions initiated in 2015 and 2016 were still not
concluded in September 2017.
Figure 6: Number of loan sales transactions recorded in 2015
and 2016, Status in September 2017
Figure 7: Bid and ask prices for NPLs across EU Member
State derived by a theoretical model
Source: COM calculations with KPMG data, which is retrieved
from publicly available sources.
Source: Commission calculations (see Annex 4.3). Note:
The diagonal line represents a situation where the
theoretical bid and ask prices are equal. The higher the
vertical difference between the data points and the
diagonal line, the higher is the estimated bid-ask gap.
Since market participants do not disclose actual bid and ask prices, the gap between them can
only be estimated by means of a theoretical model that combines the main determinants of
price formation on both market sides. Figure 7 shows how initial bid and ask prices could
differ across EU Member States using the model presented in Annex 5.3 The difference from
the bold 45 degree line indicates the size of the bid-ask spread.
Additional factors that influence bid and ask prices are listed in Box 2 in Annex 5.1. The other
measures in the NPL Action Plan, such as the establishment of transaction platforms or data
standardisation, would reduce transaction costs and therewith the bid-ask gap and thereby
foster demand for NPLs. They would not address the mentioned distorted incentives, which
32
The use of an advanced auction technique (Vickery method, i.e. the portfolio is awarded to bidder with
the highest price, but at the second highest price offered) by Fannie Mae and Freddie Mac in their
auctions of NPLs can be considered evidence that the suppliers of NPL suppose that potential buyers
are misrepresenting their valuations when they bid for NPLs.
AT
BE
BG
CY
CZ
DE
DK
EE
EL
ES
FI
FR
HR
HU
IE
IT
LT
LU LV
MT
NL
PL
PT
RO
SE
SI
SK
UK
10
30
50
70
90
10 30 50 70 90
Bid
prices
in
%
of
gross
book
value
Ask prices in % of gross book value
16
lead to reluctance of banks to sell. Establishment of AMCs could also reduce transaction costs
and the bid ask spread, for example through re-packaging of NPL portfolios from different
banks. They could also be instrumental in re-balancing bargaining power on NPL markets,
thereby addressing the incentive issue. Market structure would then be determined by few
large players with market power on both demand and supply side of the market. While this
may lead to higher NPL prices and lower bid-ask gap, it may also discourage market entry of
further, especially smaller, investors and therewith not engineer an increase in demand for
NPLs.
Limited buyers' participation and weak competition leading to lower bid prices and concentration on
large NPL portfolios
Low demand for NPLs has led to small transaction volumes and low bid prices.33
Market
entry of new non-bank investors could enlarge the investor base and thereby increase demand
and competitive pressure. Higher competition among NPL buyers, in turn, would increase bid
prices, entailing larger incentives for banks to sell. Entry conditions for potential NPL
investors are therefore a critical parameter to stimulate demand.
New entrants could come from various sources. There are third-country investment funds that
target distressed debt or special situations, but not yet active in Europe. There are also smaller
NPL investors in European Member States that target their home market, but refrain from
acquiring loans in other Member States. Finally, there are also a few European firms that
acquire NPL portfolios from various European banks, but specialise on specific asset classes
(see Annex 5.1). Institutional investors such as pension funds and insurance companies are
usually not active as direct market participants, but according to market sources some hold
shares in investment funds that buy NPLs.34
Taking a standard market diagram, an increase in
the investor base would translate into higher bid prices and higher demand (see Annex 5.1).
Policy measures that stimulate banks to supply NPLs or improve matching process are subject
to other NPL work strands in the Action Plan (see Annex 4.1).
Foreign firms have been the largest investors in NPLs. Among the largest 10 investors in
global distressed debt are 9 domiciled in the US and one in Canada (see Table A.5.1 in Annex
5.1). Broadening the potential investor base would be essential to increase demand for
European NPLs. Since smaller European banks have a large exposure to NPLs, there seems to
be also a mismatch in the size of NPL portfolios between what smaller banks could sell and
non-bank investors currently active in the markets are interested to buy. While there are some
smaller to medium-sized European investors in the market, they seem so far to be specialised
on specific asset classes or Member States, and realise somewhat smaller average transaction
volumes.35
33
Bruegel (2017) lists the concentrated NPL investor base as a market failure.
34
One respondent to the public consultation argued that the direct participation of institutional investors
would require NPL portfolios to become available in form of securitised products.
35
See Annex 5.2 for an overview of major firms active on the buyer side of the market.
17
Limited availability and limited geographical reach of loan servicers
A particular factor that can discourage NPL investors to enter the market is the difficulty to
access third-party loan servicers. Many submissions to the public consultation supports the
notion that access to loan servicers is important for NPL markets to develop.36
Member States
with high NPL volumes and relatively vivid loan sales such as IE, IT and ES have on average
more loan servicers whereas in some other Member States such as FR and AT, loan sales are
under-proportional and loan servicers play little role (see Annex 5.2).
Loan servicers take care of the "after-sale services", they administer the interest payments of
debtors, collect the principal, send notices and conduct other activities that affect the recovery
value of NPLs. They have a particular role in the administration of NPL portfolios once these
are sold, because it is important for the buyer of an NPL portfolio to exclude the originating
bank from the debt collection to take full ownership and resolve any possible moral hazard.37
See Box 1 in Annex 5.2 for a review of the value added of loan servicers.
Most buyers of NPLs are investment funds or asset managers without loan servicing capacity.
Their expertise is in asset valuation and risk taking. They require access to third-party loan
servicers for managing NPLs. Since loan servicers request a fee for doing so,38
high costs for
loan servicing are a potentially important deterrent for non-bank investors to acquire NPLs.
Facilitating the expansion of loan servicers across borders would allow them to tap scale
economies, compete for business and provide their services to NPL investors at lower prices.
Loan servicers have been virtually absent in most EU Member States until recently.39
Despite
dynamic adjustment in the sector in the last two years, activity has remained fragmented along
national lines.40
Loan servicers are segmented by country, due to local regulations, and by
asset class. It is known from the US market that loan servicing benefits from scale effects,
which implies that small loan servicers are less efficient.41
Though based on a small number
of observations and subject to a number of methodological caveats, Figure 8 suggests that
third-country loan servicers active in the EU are on average larger and more profitable.
36
See reply to question 16 in Annex 2.
37
See Box 2 for an account of the advantages and disadvantages of employing independent loan servicing
companies.
38
About 0.5-1.5% per annum of the exposure managed according to market sources. See Annex 5.2.
39
Annex 5.2 gives an overview of activity and market structures.
40
This notion is strongly supported by the replies to the public consultation (see Annex 2).
41
See Federal Reserve Board et al. (2016) and Annex 5.2.
18
Figure 8: Size and profitability of firms offering loan servicing in the EU
Source: Commission calculations with individual firm data derived from Orbis or company accounts.
See Annex 5.2.
Figure 9: Problem Tree
2.2 What are the problem drivers?
The public consultation and a questionnaire sent to EU Member States about rules pertaining
to NPL investors and loan servicers in their jurisdiction helped identify factors that discourage
participation and limit incentives to conduct cross-border activity (see Annexes 2 and 6).
Limited buyers' participation
and weak competition leading
to low bid prices and
concentration on large NPL
portfolios Slow development of NPL
markets, few transactions
High entry costs from
authorisation requirements in some
Member States
ther policy measures to
tackle NPLs become less
effective
Different legal provisions
regarding loan disposal and NPL
resolution across Member States
High entry costs from licensing
requirements and other obligations
in some Member States
High costs of cross-border
expansion from different licensing
requirements and other obligations
across Member States
Buyers
Loan
servicers
Sellers
Insufficient supervisory
pressure for NPL resolution
Tax disincentives
Accounting treatment of
NPLs
Limited availability of loan
servicers, limited
geographical reach and little
scope to realise scale
economies
Low willingness for NPL
disposal, high ask prices
Large share of NPLs
remain on bank balance
sheets, restrain lending to
the economy
Different borrower rights and legal
requirements for privacy and data
Beyond the scope
Low price transparency and
information asymmetries
Matching
Lack of market infrastructure
High transaction costs in NPL
sales
Risks to financial stability
from banks with high
NPLs ratios
19
High entry costs from authorisation requirements for loan purchases in some Member States
Entry conditions are a critical parameter to augment the investor base for NPLs, to increase
competitive pressure and thereby kick-start market development.42
In several Member States,
non-banks are required to have authorisation from a public body if they purchase loans from
banks. Especially where a full banking license (as opposed to other more specific licensing
requirements) and a physical presence in the Member State concerned are required this
represent costly entry barriers for potential NPL buyers in some Member States.43
Motivation
for authorisation requirements in some cases is based on debtor or data protection concerns, in
others on a definition of bank activity that includes factoring services, or links holding of a
loan portfolio to credit creation. Significant compliance costs seem also due if the NPL
purchase requires the establishment of a securitisation vehicle or investment firm.44
Other
costly barriers relate to registration in each Member State they want to be active in,
administrative delays and limitations on the loans they are allowed to acquire.45
Non-EU
institutions face the same requirements as EU-domiciled investors in most, but not all,
Member States. 46
(see Annex 6).
Table 1: Entry conditions for NPL investors
Banking license or authorisation from central bank or supervisor BG, EL, CY, HU, LT*, MT, AT, PT*, SI,
SK+,
Authorisation from other institution DK, RO
Different authorisation for performing and NPL BG, FR, LT, PT, RO, SK
Need to employ authorised loan servicers or specific structure
(SPV, AIF)
DE, IE, EL, IT, PL, SI+,UK
Investment in NPL constrained for some types of investment
funds
BE, BG, ES, HU, FI
* for performing household loans, ** for performing loans, + for consumer credit
For more details, see Annex 6 and Appendix 6.A.3
Entry costs differ depending on firm characteristics and Member State (see Annex 3.2 and the
Box in the Annex). Market sources describe them as not insurmountable, though scarcity of
data and large variation in the few observations made available to Commission services do
not allow an in-depth assessment. Costs to obtain authorisation are estimated to be below
EUR 100,000 in most cases, unless a banking license or a securitisation vehicle is required.
For example, if a NPL investor can perform under the regulatory regime of an investment
42
ESRB (2017) confirms the importance of entry costs and time and suggests activity around these lines
would be rewarding.
43
In some Member States only entities holding banking licenses are allowed to buy NPLs, including CY,
SI (for consumer loans), and DE (where further loan drawings may be involved). In others, like ES (for
mortgage loans) and HU, only financial entities are allowed to buy NPLs. In RO, investors have to be
authorized by the domestic Consumer Protection Authority and in DK, they need to be licensed debt
collectors. In IT, investors are able to invest in NPL portfolios only through a local SPV supervised by
the national authority.
44
Examples flagged in the public consultation refer to alternative investment fund management structures
in PL, securitisation vehicles in IT.
45
The time required to obtain a license varies from 1 month to maximum 12 months, according to
Member States information (Annex 6.1).
46
In Germany, non-EU investors investing in NPL are required to establish a local German servicing
enterprise.
20
fund, the regulatory start-up costs would range between about EUR 10,000 to about EUR
15,000.47
In addition to the actual compliance costs in monetary terms, authorisation and licencing
procedures entail additional economic costs because they require potential market entrants to
acquire legal expertise to understand and fulfil obligations.48
Taking the investment fund
industry as a benchmark, a recent Commission study suggests that direct regulatory fees could
amount to less than 20% of the regulatory start-up costs, about 40% of the regulatory start-up
costs might be attributable to compliance costs in terms of labour costs and another
approximate 40% to pay external servicers for local facilities in the host country. 49
Market
sources interviewed by the Commission assessed the average of total costs to enter a new
NPL market at about EUR 60,000 to 100,000. Hence, compliance costs are deemed not
particularly high in relation with total entry costs incurred by investment firms.
Different legal provisions regarding loan disposal and NPL resolution across Member States
A further obstacle to market entry stems from the legal differences and the uncertainty this
creates for the loan acquirer about their rights with respect to loan enforcement from the
ultimate debtor.50
See Table 1 for an overview of specific provisions in EU Member States.
The European Commission’s survey revealed that while all Member States allow the transfer
of a loan, the legal instrument is different as it either entails the transfer of the credit rights or
the transfer of the loan contract. Hence, entry and conduct rules for investors willing to buy
NPLs differ across EU Member States and in some Member States by type of loan, implying
that investors' interest to buy and therewith banks' ability to sell NPLs is fragmented across
Member States and also by asset class.51
Differences in the legal framework entail additional costs for investors active on different
national markets. They mean potential foreign NPL non-bank investors need to identify and
respect the relevant licensing requirements and compliance costs in each Member State they
want to be active in. Moreover, loan acquirers need to adapt their business model to each legal
framework, which implies that for each Member State where they want to buy NPLs they
have to develop an idiosyncratic approach for the valuation of loans, their relationship with
the debtor, the procedures to enforce loans and other parts of their business conduct.
47
European Commission (2017), Impact Assessment: Initiative cross-border distribution of investment
funds.
48
See Annex 3.2 for an overview of costs and their determinants.
49
European Commission (2017), Impact Assessment: Initiative cross-border distribution of investment
funds.
50
This includes inter alia access to collateral, out-of-court enforcement and court rulings.
51
For example, only financial institutions are eligible creditors to floating mortgages and financial
collateral in ES. Licensing of third parties for loan purchase is necessary for selling NPL consumer
loans SI while for the sale of NPL corporate loans, there are information restrictions.
21
Table 2: Different requirements to business activity of NPL investors across EU Member States
Debtors consent required, OPUC BE, SI*, SK,
No transfer of consumer credit loans, OPUC BG
Restrictions on transfer of collateral, OPUC CY, UK
Mandatory notification required BG, CZ*, DE*, EE, EL, IE*, HR,
CY, HU, PT, SK, FI
Specific loan form for transfer of the loan or the collateral LV, LT, HU*, SI
Notarial certification and registration general practice or
required for the transfer of some assets
BE, BG, CZ, DK, DE, IE, ES, FR,
AT, PT, SI
Specific requirements for some loans BE, DE, AT, SI, SK, ,
Transferor requires authorisation from supervisory
authority
BE, DK*,HR, LV, LT*, HU*, AT*
Banks retain responsibility if loan is transferred to entities
not subject to bank secrecy
CZ, LT, MT, SK
Banks are not totally discharged from data protection
responsibility
EE, PT, SI
Transfer of confidential data restricted, OPUC BG, AT
* for specific loans or cases
OPUC := overriding possible under conditions
Source: Member State information, see Annex 6.1.
The costs for NPL investors that the fragmentation of legal frameworks across Member States
entails could be a reason why about 75% of the investors that bought NPL portfolios in 2015
and 2016 did so in only one Member State (see Table in Annex 5.1). The replies to the public
consultations reveal that stakeholders consider the legal framework, insolvency rules and
local habits as obstacles for cross-border activity. Some respondents also referred to data
issues or incentive problems as factors (see Annex 2).
A cost estimate of the impact of these factors is not possible given the lack of data and strong
differences across Member States. Information from market sources suggests that costs for
supervisory reporting, internal audit, risk compliance, credit management procedures and anti-
money laundering differ substantially across firms. A common pattern is that costs for
compliance with anti-money laundering legislation are sizeable, which is in line with the
prominence of know-your-customers concerns in the replies to the public consultation.
High entry costs from licensing requirements and other obligations for loan servicers in some Member
States
Loan servicers are exposed to challenges similar to NPL investors with respect to
authorisation and licensing. Regulatory entry barriers are more widespread across Member
States than those for NPL investors and often motivated by debtor and data protection
considerations. For this reason, some Member States even request physical presence in the
Member State. The request for authorisation and domiciliation in particularly allows
supervision by domestic authorities. Since restructuring of a loan can entail new lending,
22
some Member States request from loan servicers to obtain a banking license.52
Some Member
States also insist that NPL investors make use of loan servicers that are licensed and
supervised by their authorities (See Annex 6)53
. Non-EU loan servicers are permitted in all
Member States, except one.54
Table 3: Entry conditions for loan servicers
Banking license DE*, FR**, HU, MT**, AT, RO**, SK
Authorisation from central bank or supervisor EL, IE, NL*, PT, UK
Authorisation from other institution DK, SE, FI, IT, LV, LU
Restrictions on debt enforcement BG, DK
* depends on decision of supervisor, ** if activity covers lending or refinancing.
For more details, see Annex 6 and Appendix 6.A.3.
While fees for obtaining a license vary across Member States, they are overall small
compared to overall entry costs loan servicers face, estimated to amount to EUR 5-15
million.55
From the limited information the Commission services were able to obtain, one-off
fees for the licensing range from a few hundred to more than EUR 50,000. Annual licencing
fees vary significantly as well, ranging from a few hundred euro per annum to more than EUR
30,000. Compliance costs for data reporting could add to these set-up and licencing fees as
well as the costs to comply with anti-money laundering rules that may prove significant.
High costs of cross-border expansion from different licensing requirements and other obligations for
loan servicers across Member States
Cross border expansion can help loan servicers to grow and realise scale effects, thereby
allowing them to offer lower prices for NPL investors. Since this requires multiple
authorisation processes and adjustment of the business models to national conditions, cross
border expansion is made more costly by differences in licensing and conduct rules across
Member States. Loan servicing activities primarily fall under the freedom of contract, and
there are no formal legal definitions of 'servicing', 'managing' and/or 'debt collection' of loans
in most Member States. The resulting legal uncertainty about definitions applied in other
Member States could be a reason why few loan servicers pursue cross-border expansion
strategies. Reduction of legal uncertainty by the adoption of legislation that governs the
establishment of loan servicing firms, as part of the country's economic adjustment
programmes, has been instrumental in fostering the market in Ireland. Comparable legislation
52
In almost all Member States, servicers do need to comply with certain fit-and-proper requirements. In
IE and EL, servicers are required to comply with specific requirements and only entities that have an
appropriate licence can conduct credit servicing. In LV, a provider of debt recovery services requires a
special license. In DE, FR, HU and AT, they require a restricted banking license.
53
For example, NPL investors can acquire loans in EL only under the condition that they have signed a
loan management agreement with a servicing company properly licensed and supervised by the Bank of
Greece. In DE, non-EU investors investing in NPL are required to establish a local German servicing
enterprise.
54
In EL, non-EU loan servicers are not permitted and non-Greek EU loan servicers must act through a
branch. In AT, in case of pure outsourcing, stricter requirements can apply especially with regard to
data protection issues.
55
ESRB (2017) quotes market information for this estimate.
23
has also been adopted in Greece and has led to the establishment of loan servicing firms in
that country very recently.56
A specific point to loan servicers is how their relationship with non-bank NPL investors is
governed, which entails possible restrictions on which services they are allowed to offer to the
latter. There are no explicit prerequisites that a creditor has to satisfy before outsourcing
certain servicing functions unless outsourcing is deemed to affect core functions or services in
almost all Member States. However, loan monitoring and refinancing, which are typical by-
products of loan servicing are considered a core services in some Member States.57
In this
case, outsourcing to loan servicers is not allowed or tied to strict requirements. Moreover, the
creditor cannot outsource the undertaking formal enforcement actions in the large majority of
Member States, i.e. investor-linked servicers are not permitted to undertake such actions on
the creditor’s behalf.
The variation in licensing costs across Member States referred to above can serve as an
approximation of the entry burden to loan servicing markets. In the absence of direct cost
estimates, evidence that they have a material impact can be derived from the observation that
as regards cross-border entry or expansion of loan servicers, the most frequent approach in the
last years has been the acquisition of existing national loan servicers, implying that expansion
to a new market is difficult without national incumbents already being present.
Different borrower rights and legal requirements for privacy and data
Respondents to the public consultation stress data and information problems to be a major
obstacle to the acquisition of NPLs. Restrictions on non-bank investors are motivated by
concerns about bank secrecy and personal data protection. These restrictions impair the
transfer of information from the bank to the non-bank investor. This, in turn, complicates the
evaluation of the value of the loan portfolio before the sale is signed, i.e. the potential buyer
has only access to limited and anonymised information from which he needs to assess the
recovery value of the NPL and, to the extent loans are collateralised, the value of the
underlying collateral. The existing fragmentation among Member States of rules on data
protection renders data management by non-bank investors more difficult in case they aim
administer loans from different jurisdictions at a central place in order to realise scale
effects.58
Bank secrecy provisions generally contain an exemption that allows the bank to disclose data
which are necessary and proportionate for selling the loan. The FISMA survey unveiled legal
constraints in a number of Member States. For example, the transfer of confidential data is
only allowed under the debtor's consent or an authority's decision in a few Member States (see
Annex 6). Despite possible constraints from privacy and personal data protection, banks as
sellers and non-banks and buyers have found ways to cope with them, for example by
56
A first loan servicing firm was authorised in July 2017.
57
See Annex 6.
58
This situation is expected to improve with the application of the General Data Protection Regulation as
from May 2018 and the harmonization of data protection rules resulting therefrom.
24
providing anonymized or aggregated data in the pre-transaction phase. Hence, rather than
making it impossible to negotiate a trade of NPLs, they increase transaction costs.
Cross-border transactions could entail conflict of laws. For example if an NPL purchasers
from a different Member State than the originating bank and the borrower sells the loan on to
a further NPL purchaser in another country. The latter may then question which national law
applies, especially if the NPL purchaser is in a third country. For cross-border transactions in
the EU, the so-called Brussels I and Rome I rules apply. In case of a third country and of a
borrower that is a consumer, the consumer law and jurisdiction should, in principle, also apply
but the situation would need to be assessed on a case by case basis taking also into account
the third country rules on conflict of laws. Therefore, parties to a cross-border transfer of
loans have to do their due diligence based on a set of potentially applicable laws. This inflates
the costs of legal opinions required for due diligence59
.
Borrower rights, in particular consumer rights, are different across Member States and also
defined via different legal means, e.g. through insolvency regimes, borrower and consumer
protection laws, or authorisation and supervision procedures. These rights do not change with
the transfer of a loan from a bank to a third party.60
However, the legal protection of
borrowers' rights might be affected if the transfer of the loan modified the contractual
relationship, if it led to a change of applicable law to a different country's law, or if it became
subject to a different regime of general rules on debtors' protection. This could be
problematic, in particular, for debts referred to consumers. Both NPL investors and loan
servicers therefore need to adjust their business models to the legal regime in each Member
State they want to be active in. Table 2 lists a number of rules that NPL investors and loan
servicers have to adhere to in the different Member States. The existence of various country-
specific legal requirements implies that a single market for NPLs in the EU will still remain
segmented along national lines even if authorisation and conduct rules for NPL investors and
loan servicers are standardised.
Differences in borrower rights across the Single Market motivate authorisation processes for
NPL investors and loan servicers in some Member States. For example, IE and EL explicitly
request compliance with borrower protection rules in their laws that authorise loan servicers,
SE mandates the authorisation process to the data protection authority. Other Member States
may not explicitly require a license out of the motivation to safeguard borrower rights or
personal data protection. Registration and licensing, nevertheless, gives them an opportunity
to monitor and/or supervise behaviour of the firm, therewith act if compliance with national
law is jeopardised.
Are the problem drivers significant?
Policy makers have control over regulatory costs, such as direct costs of obtaining an
authorisation to do business, and indirect costs that emerge from rules that govern the conduct
59
The Commission undertook a public consultation on the conflict of laws rules for third party effects of
transactions in securities and claims in 2017.
60
For example, recital 41 of the Consumer Credit Directive 2008/48 states: "assignment should not have
the effect of placing the consumer in a less favourable position.
25
of business and may limit profit opportunities. While the rules in place determine costs of
compliance for market entrants, not all entry costs can be influenced through policy measures.
An important fixed-cost component in the entry decision of the NPL investor is the due
diligence that has to be performed on any NPL portfolio targeted. Moreover, potential entrants
need to invest in studying local legal conditions that determine the recover value of the loans
as well as the legal rights and obligations they would have as loan owners.
The replies to the public consultation suggest that a large share of the respondents considers
an EU framework helpful and that licensing rules should be part of it (see Annex 2). While
market sources indicated that regulatory costs are not their main concern when deciding to
enter NPL and loan servicing markets, this suggests that regulatory costs are not an
insignificant part of entry costs.
Even if these regulatory costs may not be high in absolute terms, their impact on entry
decisions is amplified by:
 expanding the disadvantage vis-à-vis incumbent market players that already benefit from
an information advantage from past experiences. Entry decisions are surrounded by
uncertainty and complex interactions among a multitude of relevant factors. Most
importantly, entry costs have the character of sunk costs, i.e. they are foregone and not
reversible if the plan to enter the market is aborted or the activity turns out not to be
sufficiently profitable. Since it is uncertain that a deal with a bank can be closed, the sunk
cost character of entry investments has a significant impact on the decision to enter NPL
markets.
 becoming recurring for each national market that the investor wants to enter or expand to.
Regulatory costs and different national rules undermine the possibility of NPL investors to
enter smaller markets and of loan servicers to realise scale effects. They especially
increase search costs if either of the two considers expanding activity to another Member
State. The different legal rules across EU Member States may also discourage particularly
foreign investors to enter EU markets, for example US investment funds that are used to
face uniform rules and try to realise scale economies from conducting large transactions.
For example, scale economies are well documented for US loan servicers.61
 translating into search costs required to find out what regulatory requirements and related
costs actually are, which again increases with each national market the investor wants to
enter. The latter two are particularly important for foreign investors. In the NPL market,
entry costs entail search costs, compliance costs, costs for advise on legal and
administrative matters. Investors active in the NPL market report that costs to understand
local conditions and the relevant legislation matter importantly.
Other problem drivers
It should also be noted that the public consultation revealed a number of further factors, which
stakeholders consider important to foster activity on NPL and loan servicing markets, and
61
See Federal Reserve Board et al. (2016) and Annex 5.2.
26
which are not addressed here. Stakeholders also often stressed the impact of harmonised
insolvency frameworks and improved debt enforcement as relevant for the development of
secondary markets. Access to data is also an important factor for potential buyers in order to
assess the value of an NPL portfolio. Market sources often refer to a lack of supply of NPLs
from banks. These are subject of other work strands of the Action Plan, addressing
specifically, a review of national insolvency frameworks, templates for standardised data
through which banks facilitate buyers’ evaluation of loan portfolios and means to establish a
transaction platform. Taxation was also repeatedly listed. An obvious point is that banks are
exempted from VAT while loan servicers are liable to VAT. Annex 6.2 summarises obstacles
to the development of secondary markets for NPLs flagged in the public consultation,
including those that are subject to other work strands of the NPL Action Plan.
2.3 How will the problem evolve?
Without supportive policy measures, one could expect that the investor base in NPL grows
along its past trend and that loan sales may not increase by much as compared to the level of
EUR 100 to 150 billion per annum as realised in the last years. Loan sales may even decline
as past activity was concentrated in a few countries, and in some of them the stock of NPL has
already declined (e.g. UK, DE) whereas loan sales in some Member States with high NPL
ratios would remain at the modest level realised in the past. The consequence would be that
revenues from NPLs sales remain modest and the NPL stock on banks' balance sheet declines
gradually.
One could assume a decline in the NPL ratio along the GDP growth path. Credit growth has
been sluggish in countries with high NPL ratios. This could continue and may feed back into
relatively weaker economic growth in these countries.62
If national markets become attractive
(for example through supervisory pressure on banks to sell NPLs or reform of insolvency law
that increase recovery values) market demand could develop endogenously and when faced
with high opportunity costs of non-action, Member States may adopt legislation to support
this process. The cases of Ireland and Greece suggest that even if the NPL problem is
recognised by policy makers as requiring action, it takes time until for example laws that
govern market entry into loan servicing markets are in place.
3. WHY SHOULD THE EU ACT?
3.1 Legal basis
Article 114 of the Treaty on the Functioning of the European Union (TFEU) confers to the
European institutions the competence to lay down appropriate provisions that have as their
objective the establishment and functioning of the single market. NPL purchases are a form of
capital movement under the free movement of capital principle, which is applicable to
investors from third-countries like the US as well. The problem that the initiative under
consideration aims to address is related to different rules in the Member States as regards the
rules for third parties acquiring NPLs from banks, as well as rules for offering loan servicing
62
A recent research paper estimates that NPLs would decline significantly in Italy only if economic
growth was higher than 1.2% per annum. See Mohhaddes et al (2017).
27
services (see Annexes 6 and 7) that restrict both the free flow of NPLs within the EU and
investment opportunities for third-country investors. Consequently, the development of a
single market for NPL investors and for loan servicers faces obstacles and without measures
at EU level, national markets for NPLs and loan servicers will remain fragmented and in most
Member States underdeveloped.
3.2 Subsidiarity: Necessity of EU action
The analytical work leading to the NPL Action Plan demonstrated that NPL ratios are
currently high in a substantial number of Member States, reaching unsustainable levels in a
few cases.63
This legacy stock of bad debt creates risks of cross-border spill-overs throughout
the EU economy and its financial system. Moreover, the high stock of NPLs alters market
perceptions of the European banking sector as a whole and represents negative externalities
for the whole EU.64
These factors have become even more relevant in the context of the
Banking Union. By contributing to enhanced growth and reducing financial fragmentation,
measures to address the existing stock of NPLs would be beneficial for the EU as a whole.65
With respect to building up or expanding the investor base for NPLs, Member States have an
incentive to act and reduce regulatory barriers to attract foreign investors and to facilitate
domestic investors or loan servicers to enter the market. A few Member States have actively
acted to address the high stock of NPLs (IE, ES, EL, PT, SI), in most cases fostered through
an EU/IMF economic adjustment programme.66
Yet, progress in these Member States remains
slow and did not counteract the spill-overs of risk perceptions of a weakened EU banking
system as a whole. Given the inability to address the issue through action at the level of
individual Member States, the subsidiarity principle warrants action at EU level.
While policy measures at the national level are possible, they are likely to cement market
fragmentation. IE and EL set up legislation that governs the licensing process of loan
servicers. Both, however, followed different approaches: the Irish law requests compliance
with light fit-and-proper criteria for the authorisation without inference on business conduct,
whereas the Greek law is more demanding, requesting for example loan servicers to act
through a local entity and to take care of socially vulnerable groups (see Annex 66).
63
See FSC (2017), ESRB (2017), ECB (2016, 2017).
64
This was for example evident in a decline of share prices of almost all EU banks larger than the decline
in the general stock price index when EBA released stress test results in summer 2016, although the
results showed large differences among participating banks and suggested little exposure to stress for a
considerable number of banks. For empirical analyses on spill over in the European banking system, see
European Commission (2017a) and the references therein.
65
From the EC FIN Action Plan: "The Council […] REC GNISES that although in the majority of
Member States high NPL ratios did not emerge in recent years, the negative effects of current high NPL
ratios in a substantial number of Member States can pose risks of cross-border spill-overs in terms of
the overall economy and financial system of the EU and alter market perceptions of the European
banking sector as a whole, especially within the Banking Union."
66
Progress has become visible in rising transactions in NPLs with non banks once an asset management
company was set up (IE, ES, SI) to collect NPLs from banks and make them available for sale. In Italy,
acute banking problems gave rise to public support measures that incentivised the sales of NPLs to non-
banks.
28
Stigma effects are a very likely reason why Member States have not yet taken a more active
stance in reducing regulatory barriers to attract foreign investors to the NPL market. While
there is no hard evidence on such factors, a number of channels may be relevant. Ultimate
debtors represent a larger social group than creditors and they may see little advantage from a
transfer of the ownership of their debt to foreign investors. They may even experience
uncertainty if their debt is transferred from a creditor they know to an unknown third party
entity and if they encounter difficulties to clarify whether or not the rules protecting them
would remain valid. Since foreign hedge funds are the most visible NPL investors, their
reputation as short-term oriented profit maximising entities may discourage policy makers
from taking action to facilitate their operations. Legislators also strive to keep consumer
protection at high levels and may fear that the transfer of NPLs to non-banks could challenge
this protection. This initiative aims at addressing impediments to loan transfers, while
ensuring that borrower rights in Member States are preserved.
3.3 Subsidiarity: Added value of EU action
An EU-wide framework for NPL buyers and loan servicers would help reap scale effects and
reduce entry costs for firms intending to operate in different national markets. It would help
overcome the coordination issue in EU NPL markets where weaknesses in demand and supply
amplify each other. In particular, banks would benefit from a larger investor base since
competition among investors would exert upward pressure on prices. Investors, in turn, would
benefit from a unified European legal framework as it would reduce their entry costs and
create more favourable conditions and infrastructure for their cross-border operations.
Under an EU framework for loan servicers, firms' activity would be less constrained by the
size of the domestic market. Consequently, expansion to other markets would allow loan
servicing companies to grow in size and to realise scale effects, and potentially charge lower
fees to NPL investors. Moreover, NPL purchasers would no longer be required to build a new
relationship with a loan servicer in each market, but they would be able to work with a loan
servicer they worked with in other Member States.
So far, debt servicers and investors concentrate on a handful of national markets, probably
those with highest profit margins. In order to reap opportunities in other markets, they need to
acquire expertise about prevailing local regulation and about the availability of loan servicing
firms. While these search and compliance costs may not be very high, they still represent an
effective obstacle to entry if the target market is small.
Developing an EU-wide investor base for NPLs would also be key for the effectiveness of
other measures in the NPL Action Plan since the efficiency of asset management companies
in coordinating NPL supply, of bank supervision in earmarking NPLs, information templates
to standardise information on NPLs depends on the potential demand for NPLs.
Measures at EU level would also be beneficial to overcome the stigma effects that Member
States face when pursuing legislative changes at national level in this area.67
However, these
67
Ireland and Greece, which stand out as Member States that initiated legislation on loan servicers, did so
as part of programme conditionality.
29
measures should not decrease the level of consumer protection, as the negative consequences
of such a decrease could entail social and financial costs that might outweigh the possible
benefits.
4. OBJECTIVES: WHAT IS TO BE ACHIEVED?
A first general objective of the NPL package is to limit risks to financial stability by reducing
the stock of NPLs in the European banking system and by avoiding the build-up of NPLs in
the EU banking system in the future. A second general objective of NPL reduction is the
support of stable financing to the economy and therewith economic growth. Banks saddled
with NPLs tend to face higher funding costs and capital requirements and lower profitability,
which limits their ability to extend new credit. Persistently weak loan portfolios are thus a
potential drag on financing of firms, households and ultimately economic growth. Functioning
secondary markets for NPL would allow banks to sell NPLs to non-banks, thereby reducing
risks of financial stability and liberate resources to expand lending to the economy.
The first specific objective of this initiative is to stimulate demand for NPLs by generating a
larger investor basis, and consequently also greater competition among investors. Greater
demand for NPLs and greater competition among investors is expected to contribute to both a
higher volume of NPL transactions and higher bid prices on secondary markets. This should
contribute to reducing NPLs in banks’ balance sheets, thereby enhancing banks' resilience,
and ultimately improving lending to the economy as well as reducing risks to financial
stability. While the immediate objective is to decrease the presently high level of NPLs in the
EU and some of its Member States in particular, a larger participation of buyers on NPL
markets will also be beneficial in case of future accumulation of NPLs on banks' balance
sheets.
Mirroring an increase in buyers' participation on NPL markets, a second specific objective
consists in a complementary increase in the capacity of loan servicing firms to absorb rising
demand for their servicers from more loan sales by NPL investors. Demand would be most
efficiently matched if prices for loan servicing are competitive and geographical reach
expands to all Member States.
More specifically, to strengthen the demand side and competition on these markets, the
initiative aims at: (i) facilitating market entry of NPL investors and loan servicers in MS with
high NPLs and material obstacles to market entry, (ii) fostering the entry of smaller firms so
that smaller banks have a higher chance of finding counterparts in NPL transactions,
(iii) equal treatment across markets in Member States, allowing loan servicers to realise scale
economies from cross-border operation, (iv) enhancing competition through the entry of
foreign firms. The first two items could be considered as means to address failure in (national)
NPL markets, whereas the latter three may be instrumental in fostering a single NPL market.
The investor base would be largest if a single market was created, so that investors would not
discriminate across conditions on various national markets, and if conditions would be
supportive to foreign firms' market entry. The objective of a genuine single market seems
very ambitious given the importance of national and local determinants on NPL markets. Still
it would be desirable that both domestic and foreign investors can expand activity across
borders as easily as possible, so as to come close to a shared investor base among all EU
Member States. Harmonised licensing and conduct rules could deliver this. The same could be
accomplished by converging rules at national level. This would result in increased
transactions of NPLs, eventually leading to a reduction of NPLs in banks.
30
More competition on loan servicing markets should result in lower costs charged by loan
servicers to NPL holders and create profit opportunities through lower administrative costs
and/or allowing synergy effects with other business areas. Creating wider profit margins
through lower administrative costs and/or allowing synergy effects with other business areas
should also lead to higher preparedness to pay for NPL investors, implying a pass through to
prices that banks can realise when they offer their NPL portfolio.
Changes to entry conditions for loan purchasers and loan servicers could change the
relationship between borrower and creditor and their negotiation position, especially since the
transfer of the loan entails that the borrower faces a new counterpart that she/he had not
chosen and possibly not even known. If this new counterpart is located or authorised in a
different Member State, the borrower may consider these rights undermined, even if the
contractual obligations of the new creditor remain unchanged. It is therefore also an objective
of the initiative (v) to ensure efficient supervision and (vi) adequate safeguards for borrower
rights. This would require, in particular, that the borrower protection clauses of the original
contract are fully maintained even in case the contractual terms are modified as a result of the
transfer the loan and that the general set of consumer protection rules in force in the country
of the debtor is fully maintained and adequately enforced even in the case the debt servicer
operates in regime of passport.
It would be problematic if purchasers of NPL were outside the scope of existing data
protection rules. Acquisition of NPL by non-EU funds will imply either a transmission of data
(if the acquirer processes the data in the EU) or a transfer of data (if he processes them in a
third country) from the banks to the acquirer. In both cases the rules of the General Data
Protection Regulation (GDPR) apply with particular reference to rules on international
transfers in the latter case. Since GDPR provides maximum harmonisation, Member States
cannot raise protection standards. Since the GDPR contains a number of "opening clauses"
which allow Member States to further specify its rules and since there might be differences
between Member States' approaches to its implementation, there is a potential for
downgrading of the actual protection data receives if the new data controller is in a different
country. Such a downgrade would be avoided if the acquirer of the credit had to respect the
personal data protection prevailing in the country of the borrower.
5. WHAT ARE THE AVAILABLE POLICY OPTIONS?
5.1 Framing the policy options' features
Entry and business conditions for both potential NPL buyers and loan servicers currently vary
across Member States, as described in Section 2.2 and in Annex 6. This situation can be
improved through various channels, such as simplifying and reducing cross-country variation
of authorisation and licensing procedures and reducing administrative barriers and cross-
country variation in information sharing rules, etc. This section defines a set of dimensions
with available alternative policy choices. This framing of policy features will subsequently be
used to define the policy options.
Authorisation procedures for loan purchasers
The entry conditions for loan investors often take the form of an authorisation procedure by
National Competent Authorities (NCAs). One of the main divergences among Member States
is whether or not a banking licence is required for loan purchasers. A lighter authorisation
procedure would rely only on fit-and proper criteria (e.g., good repute of directors, to consider
31
capital requirements or professional insurance, organisational requirements on IT, risk
control, internal audit, compliance office). The authorisation requirement for purchasers can
be partially or fully waived in cases where the loan purchase is registered with a NCA and the
loan is serviced by an authorised servicer. Different setups are possible as regards cross-
border activity of loan purchasers (national authorisation, passporting, single authorisation,
etc.).
Business rules for loan purchasers
Rules applicable to the activity of loan investors may stipulate whether some types of
transfers are restricted or require additional authorisations. As regards the resolution of NPLs,
restrictions may apply for loan purchasers with respect to rescheduling of the original loans
(in some Member States a banking licence is required). Member States have different legal
instruments to transfer loans and a number of civil law provisions that may impose constraints
on what NPL purchasers can undertake, for example if debtors are in insolvency procedures.
Making these subject to harmonisation appears not proportional and is therefore not
considered part of the option set.
Scope of eligible loans
The set of loans non-banks are allowed to buy differ among Member States. While a few do
not have any limitations, some, e.g. BG, FR, LT, PT, RO, SK have different rules for non-
performing and performing loans. The purchase of consumer credit loans is not possible in
BG while also BE, LT, NL, SI and SK have special protection for household loans or
consumer credit. While the main public interest is in enabling the purchase of non-performing
loans, it is difficult to control in practice because most loans are sold in large portfolios. Some
of these portfolios contain both performing and non-performing loans.
While their interest in maintaining a customer relationship with performing borrowers creates
an incentive for banks to limit purchases to non-performing loans, actual sales often include
sales that do not fall under the formal definition of non-performing. This includes: Some loans
are expected to become non-performing, others may be partly performing, some may be
performing, but from debtors that did not service other loans, etc. Part of the wider market for
loan sales are also loans supplied by public asset management companies as consequence of
the wind up of credit institutions. 68
The actual share of non-performing loans in loan sales is
unknown; the estimations shown in Annex 4.2 suggest it could be between 70 and 80%. The
counterpart of about a third of NPLs on banks' balance sheet are households and the share of
loan sales owed by consumers was at least 11% in 2015-16.69
68
For example, one of the largest sales in 2017 related to a portfolio by UK asset manager UKAR and
compromised a face value of 11.8 billion GBP in 104000 performing loans that originated from
Bradford and Bingley before the banks was taken in public ownership in 2010. See
http://www.ukar.co.uk/media-centre/press-releases/2017/31-03-2017?page=4.
69
See Annex 5.1.
32
Authorisation procedures for loan servicers
Similarly to loan investors, the authorisation procedure for loan servicers may or may not be
linked to a banking licence requirement. Alternatively, the authorisation may merely rely on a
fit-and-proper check (as in the case of investors: repute of directors, capital requirements or
professional insurance, IT requirements, risk control, audit, and compliance). Cross-border
activity of loan servicers can also be subject to different regulatory setups (national licensing,
passporting, single authorisation, etc.).
Business rules for loan servicers
The scope of activity of loan servicers may be more or less broad. It usually includes such
activities as direct contact with the debtor, but may in some cases go as far as out-of-court or
judicial recovery. Again, servicers' role in rescheduling re-payment of the loan may require
modifications in some Member States, in order to clarify whether a banking license is
required in this context. Rules on outsourcing of activities can state whether the outsourcing
institution maintains responsibility and accountability. Similarly to above, loan servicers'
activity will be constrained by national rules, for example on debtor protection, which will
continue to be set at the Member States' level.
Protection of debtor rights, privacy and data protection
An important challenge of this policy initiative is the potential conflict with debtor rights
protection and personal data protection laws.70
Some Member States set specific conditions or
limit the scope of business activity for loan purchasers and loan servicers, others govern these
issues in other laws, independent from the authorisation process of these entities, or impose
the same rules on banks and loan servicers. In particular, the transfer of loans could cause
issues with personal data protection if the processing of data involved in the change of
creditor is carried out in non-compliance with data protection rules. If the debtor becomes
subject to an insolvency procedure, NPL investors have very different rights and obligations
in the different Member States. Since the issue of insolvency and debtor protection is covered
in a different NPL work stream, this Impact Assessment discusses the effects in terms of gaps
that could emerge if licensing and conduct rules for NPL investors and loan servicers are
changed. Member States that currently use authorisation procedures as a means to ensure
debtor rights protection may need to enact new legislation to maintain the desired level of
protection through other means, e.g. through adopting more specific borrower protection
rules.71
Since changes to the authorisation regime of NPL purchasers and loan servicers could
interfere with borrower rights, additional safeguards for the borrower could be warranted, in
particular as regards consumers. As a matter of principle, borrower protection rules stemming
from the contractual relationship as well as from legislation in the borrower's home country
70
The Consumer Credit Directive has an explicit recital that assignment of credit does not change the
defences a borrower had available against the original creditor, 2008/48/EC.
71
A benchmarking exercise, dedicated peer review by Member States, country specific recommendations
focusing on insolvencies issues in the European Semester.
33
should be maintained. In addition, these risks could also be mitigated by introducing a
requirement of notification of the debtor about the change of creditor, as well as about the
applicability of national and EU rules on debtor rights protection and civil law rules about
loan contracts. It could also be envisaged to strengthen supervision of the entities' actual
conduct to further ensure safeguarding borrowers' rights. As regards cross-border operations
of NPL purchasers and servicers, administrative cooperation mechanisms for NCAs and
dedicated contact points for debtor appeals located in the debtor's Member State of the debtor
should also be part of the policy initiative.
5.2 Identified regulatory best practices
The different elements described above need to be combined in a consistent way, yielding a
regulatory regime that would be on average lighter and more comparable across Member
States. Since it is neither proportionate nor feasible in the short-to-medium run to amend
parameters such as civil law and insolvency regime, they represent the external context
(which will be a given) to the conduct of NPL purchasers and loan servicers in a new
regulatory regime. Additional safeguards for borrowers may be required depending on the
other modifications brought by the new regulatory regime. The following list identifies
regulatory best practices in a number of areas. These could constitute building blocks for a
consistent new regulatory regime.
Licensing requirements for investors: In terms of making market access easier for NPL
investors, one approach is to not foresee licensing requirements at national level (e.g.
currently in CZ, ES, HR, LV, FI). Application of this principle to all EU Member States could
potentially undermine the debtor protection specifically targeted by the rules in some Member
States. A compromise solution is a lighter authorisation requirement for NPL investors, using
a fit-and proper approach (e.g. IE and PT use such an approach for loan servicers, see below).
Such authorisation requirement allows checking whether the applicant fulfils certain general
conditions when it enters the market (see examples of fit-and-proper criteria in the previous
section). Beyond the usefulness of the criteria themselves to ensure a certain level of quality
and protection in the market, a light authorisation regime has the merit of establishing a first
contact with the supervisor. This enables the supervisor to check, to review and, if necessary,
to sanction the conduct of the entity. With respect to preserving the current level of debtor
rights, lighter authorisation would therefore be consistent with a stronger role of the
supervisor in controlling conduct.
Use of loan servicers by investors: Some Member States have close to no specific obligation
on NPL investors, but require the use of an authorised loan servicer (IE, EL). Since most NPL
investors delegate debt collection to loan servicing companies, which are the only ones to get
in direct contact with the debtor, this requirement does not seem to lead to disproportionate
costs. Since the outsourcing mandate to a loan servicer should not discharge the NPL investor
from its responsibilities, rules need to clarify obligations and define how the investor monitors
the loan servicer. Therefore, the licensing requirements, as discussed in the previous
paragraph, could be less stringent where the NPL investor relies on an authorised servicer. If
the NPL investor performs the loan servicing itself, the rules for both loan investors and
servicers (if different) need to apply to it.
Types of loans eligible for disposal: Several Member States make a distinction between loan
purchasers acquiring performing or non-performing loans (BG, FR, LT, PT, RO, SK) or have
special rules for loans owed by households (BG and to some extent BE, LT, NL, SI and SK).
Other Member States do not make this eligibility distinction. In Member States that have
34
different rules for the sale of performing and non-performing loans this distinction tends to
lead to higher transaction costs and lower interest of investors. This may be a cause of
relatively low contribution of loan sales to the decline in NPLs during the period 2015-16 in
BG and PT and the absence of notable loan sales in FR.72
The reason why some Member
States have different rules is that they consider ownership of a performing loan as similar to
credit granting and therefore see a need to regulate them comparable to banks. This means
that such investors are required to hold a banking license. The purchase and administration of
loans, however, technically does not generate new credit. Moreover, non-bank investors do
not refinance themselves through deposits and hence should not be subject to the same
supervision or same restrictions on leverage or minimum capital as credit institutions. In
economic terms, holding and administration of an existing loan is not similar to bank business
and therefore should not necessarily require a banking license.
Apart from the cases described above, Member States do not restrict the sale of loans owed by
households and instead provide protection for consumers and house owners through other
means than authorisation conditions for non-bank loan purchasers or limitations on whether
loans owed by consumers could be sold. The wider the coverage of eligible NPL, the fewer
potential distortions between market segments need to be considered. From the perspective of
the bank, NPLs from households or corporations weigh equally on their balance sheet and
limiting the possibility to sell corporate loans would reduce the NPL’s potential market size
by a third. From the perspective of a household, consumer credit and mortgage credit may be
of same importance and it would be up to political preferences whether one or the other
requires more safeguards in case of transfer to non-banks.
Authorisation requirements for servicers: Some Member States request authorisation of loan
servicers along a fit-and-proper approach (IE, PT). They are in direct contact with the debtors
and supervisors need to ensure that they comply with relevant rules relative to debtor
protection, privacy and data protection. Although a few Member States do not have specific
licensing requirements for loan servicing firms, such an approach might not be advisable at
EU level due to the possible effects on the debtor rights. Due to risks for financial stability
and importance of debtor protection, there is a strong interest to ensure that servicing firms
have the organisational and technical capacity to operate in accordance with applicable laws
and that they can continue business even against economic or legal headwinds. Hence,
fulfilment of organisational requirements and possibly even request for indemnity insurance
or loss absorbance capacity seems useful. Similar to the treatment of NPL purchasers, a
lighter authorisation regime for servicers could be balanced by stronger supervisory rights.
Loss coverage of servicers: Most Member States do not request minimum capital for loan
servicers. However, BG, EL and RO do and in some other Member States minimum capital
requirements may emerge as consequence of the need to hold a banking license. In order to
reflect the fact that loan servicers' activity is much narrower than that of credit institutions, it
would be advisable to not subject them to capital requirements applicable to credit
institutions. In order to secure that firms are able to compensate any damages related to their
72
See Figure 5b or Figures A.4.4 and A.4.5 in Annex 4.
35
operations, one could consider a requirement of either indemnity insurance, or a capital
buffer.
Borrower rights: Very often purchasers of NPLs are from a different Member State than the
borrower or even from outside the EU.73
In order to avoid that the cross-border transfer of a
loan leads to uncertainty about which Member States' law applies, the standard approach is
that the law that governs the contractual relationship between the borrower and the initial
creditor, as well as the consumer protection rules of the borrower's home country continue to
apply. This means that the borrower rights remain untouched from the transfer and the new
owner cannot derive any additional rights if it is located in a country with a more creditor
friendly regime. NPL purchasers and loan servicers would then need to adjust their business
model and internal compliance standards to the law of the Member State of the initial loan
contract, irrespective of their domicile, authorisation and passport. Currently, market
participants rely primarily on consultancy firms and law firms to obtain such information. At
least loan servicers set up domestic entities or cooperate with domestic firms to ensure
compliance with national provisions.
Code of conduct for servicers: Ireland refers to borrower rights and to a code of conduct in its
law that governs the authorisation of loan servicers. Sweden tasked its data protection
authority with the authorisation of debt collection firms. Loan servicers need to observe
existing legislation in Member States, especially insolvency law and borrower rights. And
since they deal with personal information, they need to respect data protection laws. Other
conduct rules that govern processes how they interact with debtors may also be warranted as
regards their fundamental rights. If they take the form of legal obligations or enforceable
codes, supervisors would be entitled to control and possibly sanction in case of misbehaviour.
It is worth mentioning that some loan servicers have committed to self-set conduct rules that
restrict their interactions with borrowers to certain limits, i.e. not using communication that is
perceived as threatening or intrusion into privacy, or not spreading certain information. An
industry association of loan servicers announced its incentive to set up conduct rules for the
industry in its reply to the public consultation.
Rescheduling of loan repayment by servicers: Practice among most Member States, with
notable exceptions in BG and DK, which place limits on the capacity of loan servicers in debt
enforcement, is also that loan servicers can agree on rescheduling debtors' repayment of the
loan outside insolvency proceedings. Often they can launch or participate in enforcement
actions. It seems desirable that loan servicers do not face limitations in their efforts to
reschedule the payment stream or establish a repayment plan, provided that is bilaterally
agreed with the debtor. Even though this is in many regards not comparable to a new credit
generation, some Member States such as AT treat it as such, which leads to a banking license
requirement. Since outsourcing to external loan servicers is common practice in this business,
other national practices consider that servicers' participation in debt resolution mechanisms
(restructuring as well as enforcement) should not be hindered. In absence of requirements for
such actions, there would, however, be a need rules ensuring that responsibility is not diluted,
73
Tables A.5.1 and A.5.2 report the geographic origin of large NPL purchasers.
36
especially as regards the responsibility of the loan purchasers. Beyond these NPL-related
cases, loan services would be bound by existing rules at EU and national level.
Supervision and cross-border activity: Given the lack of EU competence in supervision on
this matter, national competent authorities play an important role as supervisors of loan
servicers. If the regulatory regime allows cross-border activity, e.g. facilitated by an EU
passport, there needs to be effective coordination between home and host supervisor. Since
these activities are supervised at national level only, there are no experiences with the
supervisory practice for cross-border transactions.
To facilitate cooperation host supervisors could be required to have a complaint office that
would receive complaints from debtors about domestic and foreign loan servicers, with an
automatic information exchange with foreign servicers' national competent authority. The
home supervisor could be obliged to act once it receives a certain number of justified
complaints. It could also be envisaged that the host supervisor may get the possibility to
withdraw the passport. National competent authorities could make use of the Internal Market
Information system (IMI) for their information exchanges.74
Right to information: Best practices for additional safeguards for borrower rights are early
information to the debtor about the loan transfer, information about possible legal defences
and complaint methods. As in several MS the NPL purchasers and/or servicers have the same
obligations vis-à-vis the debtor as the originating credit institution had it could also be
envisaged to oblige purchasers/buyers to explicitly recognise that they assume the same
obligation. It would also be important that in cases the transfer of loans from a credit
institution to a non-bank reduces borrower rights, legal gaps are addressed.
Possible best practices beyond the scope of this initiative: A number of provisions will not be
touched as part of this initiative, although they have been identified as obstacles to the cross-
border expansion of loan servicing and obstacles to NPL purchases. Standardisation of the
legal instruments to transfer loans, other civil law provisions, debtor protection rights in
national law or data protection law are outside the scope this initiative. They appear too
heterogeneous to become standardised even if cross-border firms already active on different
national markets would benefit from substantial cost savings if these were standardised, and
the possible value added of standardisation seems uncertain. Though this limits the benefits
this initiative can generate in terms of fostering cross-border market entry, existing firms
active in several markets have been able to cope with these differences.
5.3 What is the baseline from which options are assessed?
In the baseline, current rules would continue. This means that specific entry barriers in some
Member States would persist and conduct rules that discourage investor entry and the build-
up of investor relationship with loan servicers would remain effective. Although there are no
restrictions to invest in NPLs in most EU Member States, specific rules on notification to
debtors, registration of collateral, localisation and licensing may effectively hold back
74
http://ec.europa.eu/internal_market/imi-net/about/index_en.htm
37
investor entry into markets where they have not been active before. Especially foreign
investors may remain reluctant to take exposure in smaller and lesser known markets.
The investor basis for the European NPL market would likely remain at its current size
without additional incentives to boost the demand side. While the hedge fund industry
recorded growth rates of almost 9% on average during 2015-17 and even double digit growth
rates in 2013 and 2014, investment in private as well as in distressed debt has remained rather
constant at both global and European level since 2015. Statistical data by Preqin, one of the
main data collector on the alternative asset management industry, suggests that the European
distressed debt market amounts currently to approximately EUR 20 - 25 billion, including part
of the investors that target "special situations" (see Annex 5.1). Investment capacity of this
magnitude is consistent with average NPL prices of 20 to 25% of face value and a
continuation of loan sales of about EUR 100 billion per annum as observed in the last two
years. Profitability in the industry will remain at the currently high rates significantly above
10% observed in the specialised investment fund industry (Annex 5.1) and in firms offering
loan servicing (Figure 8 and Table A.3 in Annex 5.2).
If other measures of the NPL action plan effectively expand NPL supply, the baseline
scenario means that NPL supply would move along a constant demand curve with banks
offering NPLs for sale and competing for a constant investor pool. Without additional
demand, banks would not be able to realise higher prices, which increases their incentive to
keep NPLs on their balance sheet and evergreen them to the extent possible.
The economic consequences of the above described scenario are manifold. First, the
underdeveloped NPL market is expected to mean that NPLs remain on banks' balance sheets,
which constitutes an obstacle to mergers and acquisitions among banks, impairing the market-
driven restructuring of the EU banking sector. Second, if banks keep high NPLs on their
balance sheet, but do not have the capacity to deal with them in a sustainable way, losses from
NPLs can contribute to triggering a bank failure. Third, in a situation where NPL levels would
increase in some Member States, they would face limited demand and therewith limited scope
to sell NPLs to investors. Finally, in case of stress in the banking sector, banks with low NPLs
and a similar asset structure as those with high NPLs risk being penalised by investors in bank
debt, leading to higher funding costs for sound banks. Historic episodes have shown that in
times of market turmoil investors are not discriminating sufficiently between banks' different
asset quality.
Recent trends in NPL volume data show that loan sales in 2015 and 2016 contributed to a
decline in the stock of NPLs in the EU by about EUR 200 billion. The exact contribution is
impossible to be quantified because, inter alia, some loan sales also covered performing loans
and there was no information about the breakdown, and because some loans were sold by
AMCs so they did not reduce NPLs on the banks' balance sheet in the year they were sold, but
earlier.75
The EU's NPL ratio fell by 1.4 percentage points over these two years to 5.1% at end
75
For example, one of the largest sales in 2017 related to a portfolio by UK asset manager UKAR and
compromised a face value of 11.8 billion GBP in 104000 performing loans that originated from
Bradford and Bingley before the banks was taken in public ownership in 2010. See
http://www.ukar.co.uk/media-centre/press-releases/2017/31-03-2017?page=4.
38
2016.76
Thus, upon continuation of this trend, which however cannot be taken for granted, it
would take 3 to 4 years to reach a ratio of 2.2% and 1.8% in the EU. For comparison, the NPL
ratio amounted to 1.7% in the US and in Japan in 2016 while the EU NPL ratio in 2008 was
2.2%.
The baseline assumption of a trend continuation means that loan sales will remain absent or
small in a number of Member States and that NPL ratios are likely to remain at double-digit
levels (see Figure 10) in Member States such as CY, EL, PT, BG. The baseline therefore
implies risks to financial stability in those Member States where NPL ratios are high and for
the EU banking sector as a whole even if the EU average NPL ratio would have fallen to an
acceptable level after 3 to 4 years.
Figure 10: Development of NPL ratio in Member States
with small or no loan sales
Figure 11: Development of NPL ratio in Member States
with loan sales
Note: Stand-alone banks and foreign controlled subsidiaries and branches. Extrapolation of missing observations
by Commission services.
Source: ECB.
5.3 Description of the policy options
This section describes the three policy options that will be assessed in section 6. Table 4
below provides a broad overview of the coverage of these options across the main framing
dimensions described in section 5.1. For each dimension and under each option, the table
states whether the area would be covered by rules at national level, EU level, or both. The
main features of each option are the listed under each area.
Table 4: Overview of the regulatory implications of policy options across five dimensions
Baseline
Option 1 – Non-
binding
principles
Option 2 –
Minimum
standards
Option 3 – Single
rulebook
Purchaser authorisation
- Authorisation criteria
National
-
National
Recommend light
authorisation
EU
Broad fit&proper
criteria
Authorisation
EU
Specific
fit&proper criteria
Authorisation
76
From 6.7 to 5.3% with ECB data, from 6.5 to 5.1% with EBA data.
39
Baseline
Option 1 – Non-
binding
principles
Option 2 –
Minimum
standards
Option 3 – Single
rulebook
- If use of authorised
servicers
- - process lighter process lighter
Purchaser business rules
- PL and NPL purchases
- Loan rescheduling
National
-
-
National
Recommended to
authorise PL
-
EU
PL purchases
authorised
No special
licensing needs
EU
PL purchases
authorised
No special
licensing needs
Servicer authorisation
- Authorisation criteria
- Loss coverage
National
-
-
National
Recommend light
authorisation
-
EU
Broad fit&proper
criteria
Either insurance or
capital buffers
EU
Specific
fit&proper criteria
Common capital
buffers
Servicer business rules
- Compliance with
legislation
- Loan rescheduling
- Supervision
- Cross-border activity
National
-
-
-
-
National
MS discretion
MS discretion
National
supervision rules
Freedom to
establish physical
presence
EU & National
Enforceable
conduct rules
No special
licensing
National
supervision rules
Passporting,
home/host
cooperation
EU
Enforceable
conduct rules
No special
licensing
Common
supervision rules
Passporting,
home/host
cooperation
Borrower rights, privacy and data
protection
- General rights
- Right to information
- Privacy and data
protection
EU & National
National rules
-
EU data protection
rules, national
laws
EU & National
National rules
-
EU data protection
rules, national
laws
EU & National
National rules
Minimum
standards
EU data protection
rules, national
laws
EU & National
National rules
Common rules
EU data protection
rules, national
laws
5.3.1 Option 1 - Non-binding common high-level principles
A first option would be to establish non-binding high-level principles that would mostly target
entry conditions and conduct rules of NPL investors and loan servicers. These principles
cover criteria that investors would need to fulfil to serve as eligible counterparts for banks in
NPL transactions and that loan servicers would need to fulfil to provide services to NPL
investors. These principles would target areas that are most detrimental to market entrance
and that differ strongly across Member States. It would be particularly useful to target a
reduction in the regulatory burden in those Member States that have a high NPL ratio and few
NPL sales: EL, PT, HR, CY, possibly also IT77
, HU and SI.
In order to stimulate participation in NPL and loan servicing markets, the principles would
favour a lighter entry authorisation approach for both investors and servicers. EU principles
for loan servicers would include a licensing requirement, the freedom to establish a physical
77
Italy recorded a strong acceleration in loan sales in 2016 that continued in 2017.
40
presence in any EU Member States and the respect for local consumer and data protection
rules. The principles would not specifically address the Member States that require a banking
license and physical presence of NPL investors, although the recommended approach would
be to use lighter entry authorisations. It would further be recommended to lift limitations on
the type of loans that non-banks can acquire, i.e. propose equal possibilities for banks to sell
performing and non-performing loans or special types of loans, such as secured loans or loans
owed by consumers. The principles could also suggest to Member States under which
conditions loan servicers can reschedule loan repayments without generating a new loan. In
order to reduce administrative delays, these rules would usefully also determine maximum
requirements for public authorities to deal with them.
By nature, non-binding common principles would not introduce additional obstacles in those
Member States in which market entry is already simple. This could be reached through non-
legislative measures such as guidelines supplemented by country-specific recommendations in
the EU semester and/or targeted support by the Commission's Structural Reform Support
Service to those Member States most in need. While this option is non-binding on Member
States, it would be recommended that Member States that deviate from the common
principles adjust their national law accordingly. In cases where Member States establish an
asset management company (AMC) that outsources the management of loans to third-part
loan servicers and conducts auctions of NPLs, they could implement the principles by
incorporating them into the eligibility criteria for loan servicers to provide services to the
AMC and for NPL investors to participate in the auctions.
5.3.2 Option 2 - Binding common minimum standards with passporting
A second option would be binding common minimum standards for entry conditions and
business rules for investors and loan servicers, including the possibility of operators
established according to these standards in one Member State to provide services in other
Member States ("passport"). These rules would be oriented along the best practices listed in
section 5.2, but would not be defined as a general principle, but include minimum and/or
maximum conditions at EU level, that Member States would need to respect when transposing
the EU rule into national law. Member States would need to transpose these standards in
national law and need to recognise authorisations of NPL investors and loan servicers from
other Member States.
These rules would cover more subject matters as under Option 1, and would be more specific.
They would establish criteria that investors would need to fulfil to serve as eligible
counterparts for banks in NPL transactions and for loan servicers as counterparts to NPL
investors. These rules would be based on fit-and-proper criteria (repute, capital requirements
or professional insurance, complemented by organisational, IT, risk and compliance
requirements) and would determine authorisation procedures and conditions for NPL
investors and loan servicers. They would also govern outsourcing possibilities and limitations
thereof. Another covered area would be the scope for loan servicers to re-schedule debt and
their relationship to loan owners. The standards would require equal treatment of performing
and non-performing loans or special types of loans, such as secured loans or loans owed by
consumers. NPL investors would be incentivised to use authorised loan servicers. Both NPL
investor and loan servicers would be obliged to comply with the civil law of the host country,
when acting cross-border and to allow host supervisors to review their conduct. They could
also commit Member States to reduce administrative burden of the licensing process and to
refrain from enacting some limitations for NPL investors or loan servicers, such as the
domiciliation request or the need for a banking license.
41
They would also commit applicants to not derive additional obligations from the borrowers
than they had vis-a-vis the credit-originating bank. The standards would also set limits on
what applicants can or cannot do, with enforceable conduct rules that supervisors can monitor
and enforce. Since civil law provisions will not be altered, there are limits to additional
safeguards that EU standards can introduce. It is, however, envisaged to set up cooperation
among supervisors in home and host countries, so that complaints by borrowers about
inadequate conduct can be effectively followed up by competent authorities.
Market entry would be stimulated because potential investors and loan servicers could apply
for authorisation in one Member State, and would not have to request additional entry
authorisation in other Member States.
5.3.3. Option 3 - Binding single rulebook with passporting
A third option would be to harmonise entry and conduct rules in the EU for investors and loan
servicers in the EU. This would result in uniform entry conditions in all EU Member States,
which would spur market participation and allow the realisation of scale economies. The legal
instrument would establish common specific fit-and-proper requirements that Member States
require applicants to fulfil and would equally commit Member States to refrain from setting
further national licensing and business requirements on NPL investors and loan servicers
beyond the common EU rules and the applicable national laws as regards borrower rights.
The legislative instrument would introduce specific licensing and registration requirements
for those investors that are not already authorised in the EU, for example as alternative
investment fund. Financial firms and investment fund managers already authorised in the EU
or other countries would not need special authorisation. Hence, only non-financial firms,
private individuals and firms in specific jurisdictions78
would need to apply. Eligibility criteria
should be commensurate to the needs, for example covering fit-and-proper criteria and the
obligation to respect all the national consumer, debtor and data protection rules. No
distinction would be made between performing and non-performing loans or for special types
of loans, such as secured loans or loans owed by consumers. In case the acquired NPL
portfolio contains also underperforming or performing loans, there would be an obligation to
outsource loan management to an authorised loan servicing firm. The rulebook would also
include rules that govern the relationship between investors and loan servicers.
The legislative instrument would give a common definition of loan servicing, which could
also be positive for market entrance because it would eliminate legal uncertainty. It would
establish licensing requirements similar to those existing in some Member States, but with a
larger number of loan servicers. These requirements should ensure that loan servicing firms
are run by trustworthy managers and have sufficient IT and logistical capacity to offer loan
servicing in a sustainable manner. Since NPL portfolios often contain also underperforming or
performing loans, some criteria required in Member States for banking licenses should also be
considered, for example those linked to bank secrecy. This would also contribute to a level-
playing field between banks' in-house management of loans and that in loan servicing firms.
78
For example if domiciled in tax havens.
42
Since the former are regulated, it would be inconsistent if the latter were not. The legislative
instrument would request some fit-and-proper criteria for loan servicers, possibly
supplemented by conduct rules on appropriate behaviour vis-à-vis debtor and data protection.
The binding standards would broadly cover the same issues as option 2. However, under this
option the standards on these matters would be fully harmonised and Member States could not
introduce more stringent standards to goldplate the common rules. The legislative initiative
would also bring additional harmonisation of the supervisory framework. An EU Regulation
would be the suitable legal tool to accomplish this.
5.4 Options discarded at an early stage
A less intrusive intervention than changing the regulatory environment would be to set up an
information platform that stores rules governing market entry for NPL investors and loan
servicers in all Member States. Such a register would be accessible for potential market
entrants via a website. Maintaining this website could be done centralised by a European
body, such as EBA or ECB/SSM, or decentralised by public authorities in the Member State
coordinated via a common entry point or even by AMCs that exist or come into existence in
Member States. Member States would need to ensure that the information is factually correct
and updated if necessary. The institution maintaining and coordinating the website would
have the task of ensuring standardisation of the presentation of national rules.
Such an information platform would be complementary to the data standardisation project in
the Council Action Plan. Rather than facilitating potential buyers to assess the values of the
loans they envisage to buy in a transaction with banks, it would reduce search and information
costs for administrative barriers, thereby helping firms that consider entering NPL and/or loan
servicing markets. It would follow the same approach as the single digital gateway (SDG),
which aims to improve online availability, quality and findability of information and
assistance services on EU rights and national rules concerning the operation and movement in
the EU.79
The option to establish an information platform is not further pursued because the benefits of
reducing search costs for licensing conditions seem marginal compared to other search costs
NPL investors and loan servicers have if they enter the market. While the costs of setting up
such a structure would also be small, the value added is unclear. Member States that see value
in providing such information can do so. For example Portugal is currently venturing this.
Moreover, it is not clear whether the advantages of centralisation through an information
platform are higher than information provision through competitive private firms. The
information platform would crowd out the provision of the same service by consultancy firms.
Table 5: Maintained and discarded options - Standardise and simplify entry and conduct rules for potential NPL buyers and
loan servicers
0 Baseline: no policy action at EU level √
1 Non-binding common high-level principles √
79
See https://ec.europa.eu/info/law/better-regulation/initiatives/com-2017-256-0_en.
43
2 Common standards with passporting √
3 Single rulebook and common market supervision √
4 Establish information platform to register national
rules
Discarded
√ := Option maintained and discussed below.
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS?
As indicated in the introduction, there is a general need to reduce NPL levels in European
banks. The positive economic impact of reducing NPLs from banks' balance sheets will be an
increased lending capacity of banks and improved financial stability resulting in increased
market confidence, both likely to result in increased economic growth.
The different policy options address a narrow set of actors, consisting of the selling bank, the
potential buyer, the loan servicer and the ultimate debtor. The main impact would therefore
relate to these stakeholders.
The bank's sale of the loan to a non-bank may potentially affect the borrower and his/her
rights. A positive example of a loan transfer beneficial to borrowers would be if the loan
purchaser or servicer offered distressed debtors a more suitable payback profile of their loans.
By way of negative example, it may also be that the loan purchaser or servicer would treat the
borrower more strictly than the credit-originating banks (e.g., due to lesser reputational risks).
However, even if the law applicable to the loan purchaser (e.g. the banking prudential
framework would be replaced by another framework applicable to the buyer) changed with
the sale, the same civil and commercial law, including the safeguards in the consumer
protection rules, would continue to apply to the credit agreement based on which the loan is
granted.
In view of the above, the transfer of loan from a bank to a non-bank investor does not change
contractual obligations of the borrower. However, the change of the creditor means that
borrowers are facing a new counterpart with whom they did not conclude contract, who may
be less regulated than the originating bank and/or located and regulated in another Member
State. Protection of borrowers is the most common reason for existing authorisation
procedures in the Member States.
Similarly, information-sharing between investors and loan servicers could conflict with data
privacy and business secrecy or, depending on the business model of the loan servicer or
investor, lead to risks of excess profiling. This initiative therefore needs to ensure that
purchasers and loan servicers comply with data protection rules in the country where the
credit was originated.80
Although the coverage of the policy options is limited to authorisation of loan purchasers and
loan servicers and lightening a few selected behavioural constraints, such action at EU level
80
Issues related to data are expected to improve with the application of the General Data Protection
Regulation as from May 2018 and the harmonisation of data protection rules resulting therefrom.
44
may impact on Member States rules. For example, those Member States that require banking
licenses (DE, FR, HU, MT, AT, SK) would no longer be able to do so; those that have
different licensing regimes for performing and non-performing loans (BG, FR, PT, RO)
would be expected to change the rules. A number of Member States (BE, BG, ES, HU, FI)
would need to review the constraints they had put on some investment funds to buy NPLs and
BG may need to generalise the permission to transfer consumer loans. Member States that
have no specific authorisation regime for NPL investors and/or loan servicers (i.e. CZ, EE, ES
HR, LT, SI, FI) would need to designate competent authorities in the transposition of the law.
Other rules in Member States would remain unchanged and would constitute a limit to the
conduct of cross-border NPL investors and loan servicers. For example, BE, SI and SK could
keep the condition that debtors consent is required, BG and DK their restrictions on debt
enforcement81
. Mandatory notification, notarial certification and registration is required in
many Member States and untouched from the coverage of the policy options.
Direct environmental impacts are not expected, while indirect effects would occur only under
specific circumstances. For example, a more dynamic NPL secondary market and better
possibilities for banks to offload them should create more space for bank lending to
environmentally-friendly, or more broadly sustainable projects. Moreover, since these
projects are not immune to become non-performing, a better NPL market also allows banks to
sell them, which might increase their willingness to fund them in the first place.
81
The proposal to introduce accelerated extra-judicial collateral enforcement will also lead to change in
the capacity of creditors to enforce corporate debt.
45
Figure 12: Assessment of effectiveness and efficiency
Address failure in (national) NPL markets
Facilitate entry in Member States with high NPLs
and material obstacles to market entry
To support banks in specific Member States to
sell NPLs
Foster entry of smaller firms To support smaller banks to sell smaller
portfolios of NPLs
Foster a single NPL market
Equal treatment across markets in Member States To encourage cross-border expansion of NPL
purchasers and loan servicers
Realise scale economies from cross-border
operation
To encourage cross-border expansion of loan
servicers and help NPL purchasers realise lower
costs for loan servicing
Enhance competition the entry of foreign firms To foster competition among NPL purchasers
and loan servicers
Safeguards for borrower rights
Ensure efficient supervision To prevent misconduct of NPL purchasers or
loan servicers vis-à-vis borrowers
Costs of adjustment of laws that protect borrower
rights
To ensure that borrowers rights are not
undermined by a change in authorisation rules
6.1 Option 1 - Non-binding common principles for NPL investors and loan servicers
The option could be implemented relatively quickly if pursued outside legislation at EU level.
For example, the implementation could build on guidelines agreed by Member States.
Whether such guidelines are able to deliver a quick reduction in the NPL ratio would depend
on whether those Member States most concerned are willing and able to amend national
legislation along the lines set out in the common principles. This represents the major risk and
drawback of this option. At European level, Member States could be incentivised to take
action through country-specific recommendations under the European semester, through an
accessible list of best practices, or via technical support from the Commission's Structural
Reform Support Service. Efforts towards raising political awareness and creating political
acceptability for related legislative measures would also be helpful.
Address failure in (national) NPL markets
Common principles would aim to address the most material entry barriers, such as those
linked to the requirement to apply for a banking license or to establish a local entity.
Consequently, market entrants would benefit from cost savings from less demanding
requirements and faster administrative processes. Monetary cost savings might be in the order
46
of a hundred thousand euro if a banking license or structure of a securitisation vehicle is no
longer required and there may also be further cost savings if no local entity has to be set up or
capital requirements are lower.82
Still, assuming a reasonable adoption of the initiative by
Member States, the monetary cost savings are dwarfed by the large returns in NPL
transactions.83
Though actual cost savings are incremental, it could contribute to foster
participation in so far underdeveloped markets. Hence, increased market entry is expected to
be concentrated in countries with currently high requirements on the applicant, with long
administrative delays and without meaningful loan sales.
Since entry costs are mostly fixed costs and have a sunk cost character, the magnitude of the
benefits would be higher for market entrants that are smaller in size and have lower capital
positions. Consequently, common principles are likely to constitute a particular incentive for
small firms to enter previously ignored markets. One possible business strategy for such firms
would be to specialise on bidding for smaller banks' portfolios.
Foster a single NPL market
Since implementation of the common principles would lead to convergence in standards
across Member States, treatment of NPL investors and loan servicers would become more
equal. In those EU Member States where existing rules already fulfil common principles,
potential market entrants would neither face lower costs nor better incentives, but firms based
in these Member States would face lower barriers to expand activity to markets with hitherto
higher entry barriers. Hence, EU firms that consider expanding their NPL purchasing or loan
servicing activity would be immediate beneficiaries of lower entry costs. Similar benefits
would emerge for such firms based in third countries.
While helping to reduce entry costs and to let market conditions to converge somewhat,
common principles would not create a single secondary NPL market because not all Member
States may follow them fully. They could for example maintain or introduce different rules
for sales of performing and non-performing loans or have special rules for different types of
loans even if the common principles contained a clause that requested equal treatment of all
types of bank loans. Moreover, non-binding common principles would not allow introducing
a passport and would therefore not allow firms to operate in other Member States without still
meeting national authorisation requirements in each Member State, and these authorisation
requirements will still diverge to a certain extent. As a stand-alone measure, the reduction of
burden in relation to the common principles is unlikely to generate a large incentive for
foreign NPL investors and loan servicers to enter new markets. It may nonetheless contribute
to more entry at the margin, especially if combined with other policy measures that lead to a
82
The available compliance data is short, not-representative and shows strong variation across Member
States and firms (see Annex 3.2). In order to obtain a better view on compliance costs, DG FISMA will
launch an external study to update and expand upon the results of Europe Economics 2009).
83
The literature points to a target profit margin of about 15% (Ciavoliello et al. 2016), actual returns in
debt funds investing in distressed debt are about 10% (see Table in Annex 5.1). With an average face
value of an NPL transaction of EUR 500 million and assuming a transaction price of 20%, expected
revenues would be in the ballpark 10-15 million.
47
greater supply of NPLs, lower information and transaction costs or higher recovery values of
the underlying loans.
Specific for loan servicers: The reduction of entry costs for loan servicers through common
principles should incentivise some loan servicing firms to expand their cross-border activity.
The greater ease to establish a loan servicing firm, the availability of more loan servicers and
lower costs of loan servicing through more competition among loan servicers would
collectively further boost the NPL markets.
Impact on borrowers
If under this option, more NPL are sold from banks to third party entities, more borrowers are
likely to face a third-party loan servicer. The latter would be operating under supervision of
the debtor's national authorities and in accordance with national rules. Member States will
therefore be able to maintain the desired level of borrower rights, even in cases where the
authorisation regime becomes lighter as a result of the implementation of the principles (also
discussed in the following section).
Safeguards for borrower rights
In those Member States where the implementation of common principles would lead to lighter
authorisation regimes, it will be up to national competent authorities to ensure adequate
supervision, for example by effective follow-up to borrower complaints.
This option would not have a large impact on supervision and the costs thereof. Member
States and those in which a larger number of market participants will be active would receive
more applications and need to supervise more market participants. They would need to build
up additional administrative capacity.
The main advantage of this option would be that it would leave the highest degree of
flexibility to Member States on how to best accommodate them to other applicable laws, in
particular those affecting borrower rights. When implementing the common principles,
Member States could review whether they entail gaps in borrower rights and adjust either
these laws or those laws that implement the EU principles accordingly. This could cause some
costs for the public sector.
All in all, the immediate economic effects coming from common principles seem limited. For
instance, if the reduction of entry barriers helps kick-start market developments in some
Member States, other Member States could follow suit. In addition, once tangible benefits
from developing NPL markets are realized, Member States may consider reducing entry
barriers further. These indirect implications cannot be quantified.
48
Table 6: Impact of non-binding common principles (assessment relative to baseline)
NPL
investors
loan
servicers
Address failure in (national) NPL markets
Facilitate entry in MS with high NPLs and material obstacles to market entry +
Foster entry of smaller firms +
Foster a single NPL market
Equal treatment across markets in Member States +
Realise scale economies from cross-border operation 0 ++
Enhance competition the entry of foreign firms +
Impact on Borrower
-
Safeguards for borrower rights
Ensure efficient supervision -
Costs of adjustment of laws that protect borrower rights -
6.2 Option 2 - Binding common minimum standards with passporting
Address failure in (national) NPL markets
The advantage of common standards and passporting would be that investors and loan
servicers could establish entities in other countries or provide services across the EU/ EEA
without the need for further authorisation if they are already active in one country. The
resulting saving of additional compliance costs, legal certainty and avoidance of
administrative delays would have a positive impact on the incentive of incumbent market
players to expand activity to other Member States. Since the magnitude of cost and time
saving would depend on the Member State targeted, market entry would be over-
proportionally stimulated in Member States with currently high entry barriers.84
This effect
would be larger than under option 1.
A further advantage is a more positive impact on market structures than in option 1. Smaller
investment firms or investment funds considering to enter the market or to expand activity
cross border would benefit more than larger ones, which are already in the market, because
the fixed-cost character of entry costs is relatively more important for smaller amounts
invested. Hence, the measure could stimulate competition for smaller NPL portfolios. While
the immediate objective of the measure would be to increase competition among investors for
NPL portfolios, a uniform passporting/mutual recognition rule would also increase
competition on the supply side as investors would face more offers from banks.
84
A quantitative estimate of cost and time is not possible because of lack of data. By means of example,
the first loan servicers in Greece were authorised in July 2017, one and a half year after the dedicated
law on loan servicers had become effective. First NPL transactions in Greece occurred in 2017.
49
Foster a single NPL market
Legal differences across Member States could be further reduced, as compared to the previous
option, if entry conditions for investors and loan servicers are defined in an EU Directive and
the standards do not provide scope for different rules for performing and non-performing rule
or specific forms of loans. It is possible that the use of passporting will only be possible if
entry conditions converge in Member States. This would also imply they could become
stricter in those Member States with currently rather lenient ones. In this case, the common
standards with passporting/mutual recognition are expected to still deliver lower entry barriers
on EU average than under the baseline. A possible discouragement seems less relevant for
loan servicers, because domestic licensing or registration is standard in most Member States.
The availability of a passport could help attract third-country investors because one-stop
licensing would allow them to access multiple EU NPL markets from a single subsidiary. In
particular, this would incentivise NPL investors to enter markets in which licensing is
currently overly cumbersome.
Specific for loan servicers: The possibility to expand activity across borders via passporting
seems particularly beneficial for the loan servicing sector, where the scope to realise scale
effects is significant. The likely ultimate outcome is lower loan servicing fees charged to NPL
investors.
Impact on borrowers
Under this option, NPL sales to third parties would become more common. Borrowers would
be likely to face a third-party loan servicer, some of whom would be authorised in another
Member State and operating in the debtor's country with a passport. Borrowers would be
protected from misconduct of a NPL purchaser or loan servicer through NCAs supervision in
the debtor's country, in cooperation with the servicer's home country NCA. Some negative
impacts on the borrowers' welfare could result from the fact that the home-host supervisor
cooperation could be less effective in dealing with misconduct from loan servicers operating
under a passport compared to a situation with national authorisation and supervision. These
problems would be most likely in the first years of the cooperation framework, and would be
expected to disappear over time.
Safeguards for borrower rights
Supervisors in host countries would need to set up effective procedures to deal with
complaints from borrowers and reinforce cooperation with supervisors in home countries,
including options to withdraw passports or licenses in case of lack of compliance with rules in
host countries.
This option would therefore have an impact on supervision and the costs involved because
competent authorities in Member States would need to supervise more cross-border firms.
This entails higher complexity of actual supervision, higher responsibility vis-à-vis host
countries and coordination needs with authorities in host countries. Competent authorities in
Member States with low entry barriers could expect to receive more applications from firms
domiciled outside the EU and follow up supervision of these entities, which are likely to be
active in other EU Member States too. The regime with passport may therefore lead to higher
costs of supervision than in option 1.
50
The binding common standards could lead to gaps in the legal protection of borrowers if they
interact with other laws at national or EU level to the detriment of the borrower. This would
be the case, for example, if the authorisation of domestic loan servicers had explicit
provisions to conduct rules and the common standards had not or if the national laws impose
specific conduct with respect to data protection and the EU rules do not. Implementation of
the Directive would give some leeway for the Member State to transpose the rules in a
suitable manner, within the limits the Directive allows. For cases beyond this, Member States
would need to adjust other laws to maintain the desired status of borrower rights. The
likelihood of such adjustment to be necessary is higher than in option 1.
The legislative process for common standards with passport/mutual recognition may be
lengthy if Member States consider that maintaining their country specific regime is important.
In addition to the time required to engineer agreement at EU level, Member States'
implementation would be time-consuming.
Overall, option 2 is more effective than option 1, but at the expense of higher likely hosts to
preserve borrower rights and more intrusion in Member States existing legislative framework
and sovereignty.
Table 7: Impact of binding common principles with passport (assessment relative to baseline)
NPL
investors
loan
servicers
Address failure in (national) NPL markets
Facilitate entry in MS with high NPLs and material obstacles to market entry ++
Foster entry of smaller firms +++ ++
Foster a single NPL market
Equal treatment across markets in Member States ++
Realise scale economies from cross-border operation 0 +++
Enhance competition the entry of foreign firms ++
Impact on Borrower --
Safeguards for borrower rights
Ensure efficient supervision --
Costs of adjustment of laws that protect borrower rights --
6.3 Option 3 - Single rulebook and common market supervision
Address failure in (national) NPL markets
In order to become quickly effective, the Regulation would not strive to harmonise the legal
tools available to transfer loans. In view of the different legal traditions in Member States, this
appears too challenging to be accomplished within a reasonable time span. Moreover,
changing the fundamentals of the civil legal system does not look proportionate to the
underlying problem and it does not seem achievable politically within a reasonable time span.
51
Instead, the single rule book would harmonise entry rules, thereby undo specific differences in
entry conditions across Member States and particularly the costly obstacles to entry that exist
in a few Member States. The single rule book would therefore particularly improve entry
conditions in Member States facing high entry barriers by removing entry barriers that result
for example from the need to obtain a banking license, to operate via a local entity or to use
specific legal vehicles to hold NPLs such as a special purpose vehicle in securitisation
arrangements or a specially created investment fund. The removal of some of these obstacles
would significantly reduce entry costs and it could make investors more responsive to the
NPL supply by banks. In this respect, the single rule book would be more effective than
minimum standards.
Participants already active in one Member State would face no additional administrative costs
or administrative delays when expanding activity to other Member States. Market entrants
could realise monetary cost savings as high as in the case of a Directive and, compared to the
baseline, particularly if they use the passport to expand activity to Member States with
currently high entry costs and long administrative delays.
This would lead to a significant increase in the NPL investor base if investors expect supply
to be sufficient and profit opportunities to be satisfying. As an isolated measure, the lowering
of entry costs is expected to have a limited impact on entry decisions given that entry costs are
small compared to other costs in the purchase process such as search and information costs to
evaluate the value of the NPL portfolio for sale, costs for legal advice and compliance with
different legal instruments in the Member States to transfer loans.
The market conditions for loan servicers will depend not only on the introduction of a
passport but also on the demand for their services by NPL investors. The latter effect is
particularly important in the short run. Over the longer term, the benefits of a more
competitive market for loan servicing would become increasingly important. One example is
the securitisation of loans, where lower costs of loan servicing contribute to more
securitisation activity. Banks would also benefit from lower costs by outsourcing loan
servicing to specialised firms. Finally, loan servicers are more IT intensive and smaller in size
than banks so they may contribute to the pace of innovation and to technical progress.
The impact on the market structure is uncertain. Larger and more efficient secondary markets
for NPLs could foster structural change in the banking sector of those countries with a high
stock of NPLs.85
As regards the impact on NPL investors and loan servicers, a single market
framework could accelerate market adjustment, possibly encouraging entry of smaller NPL
investors. The case is less clear cut for loan servicers. On the one hand, the standardisation of
market entry may incentivise smaller firms to enter, accelerating the trend of the last years.
On the other hand, the loan servicing market has dynamically evolved in the last years with a
number of firms merging or being acquired. Hence, higher competitive pressure may lead to
on average loan servicers.
85
For a review of the channels through which NPLs impair merger and acquisitions activity in the
banking sector, see the special feature in ECB (2017b).
52
Foster a single NPL market
The uniformity of rules would establish a level playing field of NPL investors and loan
servicers, which is conducive to an intensification of competitive pressure among them. It
would also avoid any market segmentation for different types of loans such as performing or
non-performing-loans or loans owed from specific counterparts. This should contribute to
lower bid prices for NPL portfolios.
Similar to the previous option, the single rule book might lead to tighter rules in Member
States with currently lenient ones. For Member States with low NPL levels and consequently
a low NPL supply, this measure would be close to neutral. These Member States would
become beneficiaries in case NPL problems were to emerge in the future.
Nonetheless, compared to the status quo, harmonised rules would set an incentive for NPL
investors to bid for NPLs from banks domiciled in different Member States because cross-
border activity will be facilitated. Hence, it will also bring advantages for incumbent market
participants. Moreover, the single rulebook helps attract market entry from smaller NPL
investors and third-country investors. The former would benefit because the reduction in
compliance costs has an over-proportionate effect for them, the latter because they face a
larger market. The single rule book may also have a strong signalling effect on foreign
investors. Similar effects may also emerge under option 2, but at lower intensity.
Harmonisation of business conditions is expected to have a considerable impact on loan
servicers as they would be able to economise on licensing costs when entering several
Member States. To the extent that legal uncertainty from different definitions of loan
servicing across Member States deterred the expansion to new markets, a common definition
would eliminate this obstacle. In addition, the resulting notion of a single market may induce
third-country loan servicers to enter EU markets because licensing will be unified and
therefore easier. This measure would reduce the costs for an established loan servicer to
expand to other EU markets and it would also incentivise third-country loan servicers to enter
the EU market.
Since loan servicers' business model is characterised by scale effects, a single market regime
is likely to yield lower average costs than option 2. The cursory information about
profitability in loan servicing firms active in EU Member States suggests that especially firms
are more profitable the more assets they manage (see Figure 8 and Table A2 in Annex 5.2).
Cross-border expansion of EU firms and market entry of third-country firms would also lead
to more competition among loan servicers. Both effects are expected to reduce the costs
incurred by NPL investors when they delegate debt collection to a third-party loan servicer.
The passport would also increase the pool of loan servicers an NPL investor can choose from
when bidding for an NPL portfolio. The benefits from new market entries should be
particularly visible in Member States having low numbers of incumbent loan servicers,
especially if these are owned by competing NPL investors.
Impact on borrowers
Under this option, NPL sales to third parties would become more common. Some borrowers
would be likely to face a third-party loan servicer, some of whom would be authorised in
another Member State and supervised by a NCA in a different Member State according to a
common rule book. Borrowers would be protected from misconduct of a NPL purchaser or
53
loan servicer through NCAs supervision in the debtor's country, in cooperation with the
servicer's home country NCA. There could be negative impacts on the borrowers' welfare due
to ineffective home-host supervisor cooperation. As a result of more harmonised supervision
rules across EU Member States, it should be less severe and disappear faster over time than
under Option 2.
Safeguards for borrower rights
As compared to the previous two policy options, there could be a need for further
convergence of business practices from a single rule book to be followed by national
authorities in the authorisation and supervisory process or indeed a single institution in charge
of the authorisation process and supervision.
When a network of competent national authorities is in charge of authorisation and
supervision, it will be a challenge to establish harmonised supervisory practices. A single
supervisory body may have lower coordination needs, but would rely on expertise on the
ground and need to consider the impact of legal rules for the transfer of loans and debt
protection provisions that remain national. It is not evident whether supervisory costs would
be higher or lower than in the case of a Directive with passporting rights.
To ensure political acceptability of an easier market access for foreign loan servicers, it would
be warranted to include in the Regulation obligations for loan servicers to observe local
consumer and data protection rules. Alternatively, the Regulation could specify enforceable
conduct rules for loan servicers.
In Member States that used to ensure debtor protection through the authorisation and
supervision of NPL investors or loan servicers, there could be a need to implement new laws
that uphold the desired level of debtor protection through other means. The required
adjustment of national law and its implementation will entail one-off costs at national level.
These are likely to be higher than in case of a Directive because Member States would have
no possibility to consider them in the transposition of the Directive, but would need to
channel all adjustment needs into amendments to other laws.
Overall, option 2 is more effective than option 2, but at the expense of higher likely hosts to
preserve borrower rights and more intrusion in Member States' existing legislative framework
and sovereignty.
54
Table 8: Impact Single rulebook and common market supervision (assessment relative to baseline)
NPL
investors
loan
servicers
Address failure in (national) NPL markets
Facilitate entry in MS with high NPLs and material obstacles to market entry +++
Foster entry of smaller firms +++/++
Foster a single NPL market
Equal treatment across markets in Member States +++
Realise scale economies from cross-border operation 0 +++
Enhance competition the entry of foreign firms ++ +++
Impact on Borrower ---
Safeguards for borrower rights
Ensure efficient supervision ---
Costs of adjustment of laws that protect borrower rights ---
7. HOW DO THE OPTIONS COMPARE?
Figure 12 listed criteria against which the effectiveness and efficiency of the different policy
options are assessed under each option's assessment in the previous section. The Table 9
below summarises these individual assessments and makes it possible to do an overall
comparison of the options.
Overall effectiveness was assessed by aggregating the benefits of the options in addressing
failures in NPL markets and in fostering a single market. Overall efficiency was evaluated by
comparing these benefits to the aggregate costs in terms of maintaining the same level of
borrower rights. See Annex 4.4 for the detailed calculation. Coherence of the options was
assessed with regard to broader Commission priorities86
, but also in the specific context of the
related measures of the Council NPL Action Plan (see the section 1 for a discussion of the
interdependencies between the various initiatives of the Action Plan). Proportionality was
assessed by looking at what measures are necessary in order to achieve the stated objectives,
also taking into account the magnitude of the underlying problem.
86
See https://ec.europa.eu/commission/index_en.
55
Table 9: Summary of options and their effects
Options
Criteria Baseline
Option 1 – Non-
binding common
principles
Option 2 – Binding
common principles
with passport
Option 3 – Single
rulebook and
common market
supervision
Effectiveness 0 + ++ +++
Efficiency 0 + ++ ++
Coherence 0 + ++ ++
Proportionality 0 + +++ ++
All the policy options are expected to improve the situation over the baseline, even if their
degree of effectiveness can only be estimated. In particular, the lower effectiveness of
option 1 against the stronger solutions (options 2 and 3) stems from the Member States
coverage. The former would target material changes in a few Member States only while the
latter would likely cause changes in most, if not all, Member States. On the flipside, targeting
only the most material issues in a few Member States under option 1 would lead to lower need
to adjust other legislation to maintain their preferred debtor protection rights, whereas option
3 would require Member States to adapt significantly national legislation. Box 1 below
summarises the modelling work undertaken to quantify the magnitude of impacts of the
different options in terms of increasing NPL sales. The details and quantification of other
effects is provided in Annex 4 and 5, with evidence from the stakeholder consultation
presented in Annex 2.
Though options 2 and 3 are more efficient in fostering a single market, i.e. increasing investor
base and firms active as loan servicers, than the non-binding option 1, it could take more time
before they are effective. Common principles could be implemented particularly quickly in
Member States if they accompanied the set-up of an asset management company (AMC) that
collected NPLs from banks, outsourced their interim management to third-party loan servicers
and conducted auctions to ultimately sell them to non-banks. In this case, principles could be
introduced in form of eligibility rules for loan servicers and participants in NPL auctions
rather than through legislation.
A relevant trade-off emerges in the choice between options 2 and 3 due to their legislative
instrument, in terms of speed of enactment and effectiveness. A Regulation can be considered
superior in securing harmonised market conditions and uniform conduct of participants across
Member States. Whereas a Directive would allow Member States to reflect country-specific
conditions and preferences in their implementation and a Regulation does not, the Directives'
additional degree of freedom may also lead to gold plating and reduce effectiveness.
Trade-offs can also emerge between the opening up of competition to foreign entities and the
effectiveness of national safeguards for borrower rights. Borrowers' rights do not change with
the transfer of loans and, subject to applicable civil law, the borrower can use against the new
owner the same defence available against the original creditor. However, the borrower is
exposed to higher uncertainty because he/she is facing a new counterpart and starts from a
weak bargaining position since he/she has not delivered on contractual obligations
beforehand. Since the counterpart is located in a different Member State, the borrower may
not know it and not understand how it is regulated. At the same time, opening access to
foreign competitors appears essential to stimulate competition on NPL markets.
56
Options 2 and 3 score better on coherence than option 1, since there is a risk that the common
principles will neither achieve a more resilient financial sector, nor will they lead to more
homogeneity across the CMU. The scope of options 2 and 3 to accomplish these overarching
objectives is comparable.
Option 1 may not be able to solve the issue of high NPL in some Member States and is
therefore considered the least proportional, despite yielding some improvement over the
baseline. Option 3 is more intrusive on Member States' sovereignty and existing legislative
framework, and therefore less proportional than option 2. While Table 11 suggests a clear
ranking of the different options in terms of proportionality, this is based on the assumption
that reducing NPL is possible and risks for borrowers can be contained by adequate
accompanying policies and Member States are prepared to take the costs of these
accompanying policies. The ultimate choice will need to depend on the weight given by
political preferences to the trade-off between engineering the most efficient or effective
option on the one hand and the risk to borrowers and the costs to contain these risks on the
other hand.
Overall, the comparison of the effects of the different policy options is inconclusive as regards
whether option 2 or 3 is superior. The former has a somewhat lower effectiveness but with a
better proportionality, while the reverse is true for the latter. The ultimate choice will depend
also on policy preferences. The key question is whether the priority is to opt for a measure
that is most effective, or for a measure that maintains more room for national discretion or
minimises the scope of policy intervention to the most urgent challenges.
Box 1: Quantifying the impact of the different policy options
In order to compare the impact of the different policy options in a quantitative way, different scenarios
were imputed on the pricing model presented in Annex 4.3. The simulation results are depending on a
number of simplifying assumptions and could be different if better data was available. The model and
main results can be summarised as follows.
A larger investor base and more competition among investors for NPL portfolios should impact
investors' return requirements. In the pricing model, the expected return consists of a fixed amount and
a country-specific risk premium. For the former 15% is assumed, for the latter is the lending rate to
non-financial corporations is taken. The sum of both is a bit higher than realised returns in investment
funds (see Annex 5.1)87
, but broadly consistent with those of investment firms that provide loan
servicing (see Annex 5.2).88
The country-specific risk premium is approximated by the lending rate to
the non-financial corporate sector (DK, AT and SE). The benchmark is defined as average profit
margin in the three Member States with the lowest lending rates.89
For the simulation of the impact of common principles, return requirements decline in a group of
Member States and for the sample the group was chosen to consist of BG, EL, IT, CY, HU, AT, PL
and RO. In these Member States, it is assumed the difference between the country-specific risk
87
The median of the internal rate of return of investment funds in the data panel is 12%.
88
The average profit margin of the firms listed in Annex 5.2 Table A3 is 17%.
89
Lending rates were equally small or smaller in LU and MT, but not considered a good benchmark for
this exercise because of the small size of lending markets in these two Member States.
57
premium and those of the benchmark declines by a third. For the quantification of the effect of
passporting, it is assumed that higher competition from a larger and more mobile investor basis leads
to a decline of the internal rate of return by 0.5 %pts. This is about the difference between rates of
returns of investments in distressed debt in Europe and North America (see Annex 5.1). To reflect that
Member States with high country risk may benefit over-proportionally, the scenario also includes that
half of the gap between the Member State and the benchmark is closed. In countries with a negative
spread, this convergence effect does not materialise.
As regards loan servicers, the common principle scenario assumes a decline in indirect costs of loan
servicing by 10% in DE, EL, IT, CY, and AT. For the scenario of passporting, it is assumed that the
possibility to realise scale effects reduces indirect costs by 10%. Since Member States with high entry
barriers are supposed to benefit over-proportionally from the passporting regime, it is furthermore
assumed that half of the gap in indirect gap to the benchmark is closed. The defined benchmark is the
median of all Member States, i.e. indirect costs of 9%. This second effect is not applied to Member
States with indirect costs lower than the benchmark. For the single rule book, the scenario is similar to
those with the passport regime. It is assumed that the possibility to realise scale effects reduces
indirect costs by 10% and that half of the gap in indirect costs to the benchmark is closed. This effect
applies also to Member States with indirect costs lower than the benchmark, i.e. costs in these Member
States would increase. The impact is assumed to be asymmetric, the gap closes by a quarter for those
Member States with initial indirect costs below the median and by a half or those above the median.
The Table below shows the simulated impact of the scenarios on NPL sales using the model-based
changes in the bid-ask spread (Annex 4.3) and translating the effect of a declining bid-ask spread on
NPL sales using the coefficients derived in Annex 4.2 (See Annex 4.3 for more details). The
estimation suggests that NPL sales could increase from a level of currently about EUR 100 billion to
103-115 each year. The incremental contribution to the reduction in the NPL ratio will be marginal at
EU level. On a few Member States with high NPL ratios, the impact on the NPL ratio would be
significant, even as a stand-alone measure.
If combined with the implementation of policy measures, the existence of better functioning secondary
markets for NPLs would also help reduce help NPL ratios in future crises. First estimates suggest that
a more favourable insolvency framework with a 10% lower recovery time of NPLs leads to a further
increase in loan sales by about 10%
58
Table: Simulation results: NPL sales in billion EUR on the EU and in selected Member States two years after the measure
is in place
Baseline
Scenario A:
Common principles
Scenario B:
Passport
Scenario C:
Single rule book
NPL investors 100 102.2 109.4 109.4
Loan servicers 100 104.4 121.2 119.8
both combined 100 106.6 130.6 129.1
- memo: NPL ratio 3.1 3.1 3.0 3.0
Impact of combined measure (NPL investors and loan servicers)
on selected Member States after two years
Greece
Loan sales 0 1.03 1.75 1.74
- memo: NPL ratio 46.5 46.1 45.8 45.8
Cyprus
Loan sales 0 0.34 0.91 0.91
- memo: NPL ratio 42.7 42.1 41.0 41.0
Portugal
Loan sales 2 2 2.8 2.8
- memo: NPL ratio 16.8 16.0 14.9 14.9
Italy
Loan sales 54 58.9 71.4 71.4
- memo: NPL ratio 9.8 9.6 9.1 9.1
8. PREFERRED OPTIONS
The comparison of the effects of the different policy options shows that option 2 and 3 have
different strengths in addressing different issues, and do not lead to clear conclusions as to a
preferred option in terms of the selection criteria used in the assessment. It will therefore
require political considerations to prioritise the choices, based on the impacts and trade-offs
presented in the preceding sections.
A single rulebook Regulation that fully harmonises entry and conduct rules for investors and
loan servicers would deliver an outcome closest to a single market. Such a single rule book is
the most effective measure to increase the investor base for NPLs and reduce the currently
high stock of NPLs in the EU and some of its Member States in particular, while ensuring a
level playing field among firms from different Member States. It could imply however that
certain national specificities cannot be taken into account, and that market entry could become
more costly in those Member States in which market entry is already simple, and should be
formulated such that it minimises the additional obstacles. Still, some Member States would
be required to review whether enactment of a regulation that alters authorisation and conduct
rules for NPL purchasers and loan servicers would lead to gaps in terms of borrower rights
and data protection and would need to adjust other national laws accordingly.
Since a minimum standards Directive would allow Member States to maintain lighter regimes
provided that they respect certain minimum conditions it might stimulate market entry more
than a Regulation, depending on implementation in national laws. It could therefore be a good
option in increasing the investor base for NPLs and competition on loan servicing markets
while allowing Member States to maintain certain national specificities. At the same time it
would be less effective in ensuring a level playing field and would give more discretion to
Member States to goldplate the requirements, which would prevent these effects to
59
materialise. Some Member States would need to adjust other national law if implementation
of a Directive lead to gaps in terms of borrower rights and data protection.
The ultimate choice of the preferred option will depend on policy preferences and whether the
priority is to opt for a measure that is most effective, or for a measure that maintains more
room for national discretion or minimises the scope of policy intervention to the most urgent
challenges.
Independent of the option chosen, the coverage of the initiative would be limited to introduce
harmonised conditions for market entry and conduct of non-bank NPL purchasers and loan
servicers.
 Loan servicers would need to fulfil fit and proper criteria with respect to their
management, prove IT capacity and compliance with debtor and data protection
obligations.
 A definition of loan servicing would clarify that loan servicers are not originating credit so
that they do not require a banking license.
 Their relationship with the NPL investor/purchaser would need to be clarified and
Member States should supervise them given the loan servicers' interaction with the
ultimate debtor.
 Home and host supervisors would need to cooperate.
 Rules for NPL purchasers should be simple, possibly not going beyond registration and
fulfilment of fit-and-proper criteria. Currently, non-bank investors do not face entry
barriers in several Member States, while in others banking licences are required. If entry
conditions for NPL purchasers would be left outside the scope of EU measures, the
obstacles in other Member States would continue to exist.
 There would be no limitation on the type of loan non-banks are allowed to acquire:
performing and non-performing and independent from type of borrower
 A possibility to cover NPL purchasers without putting additional administrative burden on
them would be to offer an exemption from authorisation if they delegate the servicing of
NPLs to an EU authorised loan servicing firm. If they decide to service loans themselves,
they could be treated as loan servicers, possibly restricted to loans with consumers as
borrowers.
Two important aspects would be outside the scope of the initiative:
 It would not strive to harmonise debtor protection rules across Member States. A
reassurance of the borrowers' position may be is needed, in light of the many replies to the
public consultation that flag debtor protection as a concern of more active secondary
markets for NPLs. In any case, for all credits, additional safeguards should avoid that the
harmonisation of authorisation conditions undermines borrower rights, including the need
to impose the respect of the national rules, reinforced information to the borrowers about
their rights and legal defences and the possibility to file complaints to national authorities.
 In view of the different legal traditions in Member States, standardisation of the legal tools
available to transfer loans appears too challenging. Changing the fundamentals of the civil
legal system does not seem proportionate to the underlying problem and it does not seem
achievable politically within a reasonable
60
9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?
The proposal is expected to follow normal implementation procedures. Ex-post evaluation of
all new legislative measures is a top priority for the Commission. The Commission shall
establish a programme for monitoring the outputs, results and impacts of this initiative one
year after the legal instrument becomes effective. The monitoring programme shall set out the
means by which the data and other necessary evidence will be collected.
In terms of indicators and sources that could be used during the evaluation the following
monitoring indicators:
 NPL volumes and ratios: The relevant data is available from the ECB and from EBA for
all Member States so it is possible to conduct analysis at country level and check, inter
alia, whether Member States having hitherto high NPL ratios benefitted over-
proportionally;
 Loan sales in all Member States: this data is not collected officially so data collection and
reporting would rely on Commission services, information from supervisors and
consultancy firms;
 Composition of the NPLs, in particular amounts of secured and non-secured consumer
credits and home loans;
 New purchasers of NPLs, number of smaller banks and banks located in Member States
with hitherto low loan sales: This data would also rely on Commission services’ data
gathering, information from supervisors and consultancy firms;
 Loan servicers authorised in all Member States and their cross-border activity: This will
be sourced from national competent authorities;
 Debtors’ complaints about misbehaviour of loan servicers signalled to national competent
supervisors and supervisors' follow up. Special attention will be paid to complaints about
misbehaviour of cross-border loan servicers and their follow-up by home and host
supervisors;
 Supervisors' sanctions of non-compliance to NPL purchasers and loan servicers with
respect to borrower rights and data protection.
An evaluation is envisaged 5 years after the implementation of the measure and according to
the Commission's better regulation Guidelines. The objective of the evaluation will be to
assess, among other things, how effective and efficient it has been in terms of achieving the
objectives presented in this impact assessment and to decide whether new measures or
amendments are needed. Member States shall provide the Commission with the information
necessary for the preparation of that Report.
61
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BancaIFIS (2017), Market watch NPL, The Italian Scenario, July 2017.
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October 2017
Bruegel (2017), Analysis of developments in EU capital flows in the global context, Draft
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Gonçalves Raposo, Pia Hüttl, Alexander Lehmann, FISMA/2016/032/B1/ST/OP September
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62
Ecofin Council Conclusions on Action plan to tackle non-performing loans in Europe,
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performing-loans/
Europe Economics (2009), Study on the Cost of Compliance with Selected FSAP Measures,
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European Banking Authority (2016), EBA Report on the dynamics and drivers of
nonperforming exposures in the EU banking sector,
https://www.eba.europa.eu/documents/10180/1360107/EBA+Report+on+NPLs.pdf, July
2016.
European Banking Authority (2017), EBA Risk Assessment Questionnaire as of September
2017. EBA Staff, Risks and Vulnerabilities.
European Banking Federation (2017), EBF comments on the EC consultation on the
development of secondary markets for NPLs and protection of secured creditors, October
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European Central Bank (2016), Financial Stability Report December 2016.
European Central Bank (2017a), Financial Stability Report May 2017.
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European Central Bank and Single Supervisory Mechanism (2017), Stocktake of national
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63
Experian (2017), Debt Collection Agencies: The Keys to Improved Recoveries?, Decision
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International Monetary Fund (2014) Supervisory Roles in Loan Loss Provisioning in
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International Monetary Fund (2015a) A Strategy for Resolving Europe’s Problem Loans
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Jassaud, Nadège and Kenneth Kang (2015), A Strategy for Developing a Market for
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64
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65
ANNEX 1: PROCEDURAL INFORMATION
1. LEAD DG, DeCIDE PLANNING/CWP REFERENCES
Directorate-General for Financial Stability, Financial Services and Capital Markets Union.
The initiative is included in the Commission Work Programme 2018 as agenda planning item
PLAN/2017/1121.
2. ORGANISATION AND TIMING
Work on the Impact Assessment started in July 2017 with the first meeting of the Steering
group held on 2 October 2017, followed by three further meetings on 8 November and 4
December 2017 and 26 January 2018.
The Inter Service Steering Group was formed by representatives of the Directorates General
Competition (COMP), European Political Strategy Centre (EPSC), Economic and Financial
Affairs (ECFIN), Internal market, Industry, Entrepreneurship and SMEs (GROW), Justice
(JUST), Communications Networks Content and Technology (CONNECT), Taxation and
Customs Union (TAXUD), the Legal Service (LS) and the Secretariat General (SG).
3. CONSULTATION OF THE RSB
The draft report was sent to the Regulatory Scrutiny Board on 6 December 2017. The
Regulatory Scrutiny Board delivered a negative opinion on 12 January 2018. A revised drat
was sent to the Regulatory Scrutiny Board on 29 January 2018.
Changes introduced following the first opinion of the Regulatory Scrutiny Board
 A new introduction common to all three legislative initiatives on NPL was introduced.
It explains the NPL issue in a wider context and elaborates on the linkages between
the various initiatives in the NPL Action Plan in greater detail.
 Differences in borrower rights were introduced as problem drivers as well as
discussions how they interact with changes in the authorisation regime for NPL
investors and loan servicers. This was also taken up in the discussion on the general
impact of the initiative.
 Specific objectives have been aligned with the assessment criteria.
 The concrete provisions were further specified, including a description of the range
these provisions could take and a discussion of best practices and how they could be
combined to a consistent regulatory regime.
 Assessment criteria for the policy options were made less abstract by connecting them
to the desired impact on the main stakeholders.
 Possible adjustment needs in Member States are shown in the impact section.
 The evaluation of the impact of the different policy options was restructured and
expanded.
 The presentation of the comparison of the impacts was simplified. The translation of
detailed assessment criteria into rankings is described in a new annex 4.4.
66
 Coherence and proportionality were added as assessment criteria.
 The set of preferred options was narrowed and the link to concrete provisions this
entails described in more detail.
 The evaluation framework was made consistent with that of the other two NPL
legislative initiatives and indicators for monitoring progress were added.
 A table with information provided by Member States about their authorisation regime
for NPL purchasers and loan servicers was added as appendix to Annex 6.
Changes introduced following the second opinion of the Regulatory Scrutiny Board
 Clarification of the coverage of performing and non-performing loans in the three
options.
 Addition of new elements for reviewing the success of this initiative. The additional
indicators cover effectiveness of supervision and compliance with borrower rights and
data protection.
4. EVIDENCE, SOURCES AND QUALITY
This impact assessment is based primarily on stakeholder consultations, the study of the FSC
subgroup on NPLs and background documents prepared for the FSC subgroup, studies by EU
and international organisations90
and additional desk research of the Commission services.
More specifically, sources include:
 replies by stakeholder to the following consultations:
o A public consultation on the inception impact assessment, 26 June 2017- 22
July 2017.91
o Public consultation on the development of secondary markets for non-
performing loans and distressed assets and protection of secured creditors from
borrowers’ default, 10 July to 20 October 2017 (closed on 27 October)92
o A questionnaire to EU Member States 7 April to 1 June (last submission
received 4 October 2017)
 Feedback from stakeholders and researchers through phone interviews and e-mail
exchanges with stakeholders.
 Feedback from stakeholders through bilateral meetings between the Commission
services and stakeholders.
 Simulations with the pricing model (see annex 4.3)
 Cross-country analysis (see annex 4.2)
 Analysis of annual accounts of individual firms active in the loan servicing market
[and non-public data about compliance costs and their determinants from firms] (see
annexes 5.2 and 3.2)
 Analysis of the performance of investment funds investing in distressed debt
90
Most notably ECB, ESRB, EBA and IMF.
91
https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-3137460_en
92
https://ec.europa.eu/info/consultations/finance-2017-non-performing-loans_en
67
 statistics and data from various sources, including ECB, EBA, World Bank, ORBIS,
Preqin.
 Market reports and dedicated studies by consultancy firms (Price Waterhouse
Coopers, Deloitte, KPMG, Earnest and Young etc.);
 Analysis carried out for other projects in the European Commission,93
 academic (economic) literature (see List of References);
For a detailed description of the methodological approach, analytical methods, and limitations
of the evidence underpinning this impact assessment, see annex 4.
93
Impact assessment on initiative cross-border distribution of investment funds, 2017; Chapter on NPL in
the Bruegel study on monitoring capital flows, 2017, Study on the Cost of Compliance with Selected
FSAP Measures by Europe Economis 2009.
68
ANNEX 2: STAKEHOLDER CONSULTATION
CONTEXT
A public consultation was launched on 10 July 2017 with end-date 20 October 2017. It
combined questions on the subject of NPL secondary markets with questions on the
Accelerated Loan Security, which was later re-labelled into Accelerated Collateral
Enforcement..
Since the public consultation asked stakeholders to identify obstacles to the development of
secondary markets for NPLs and to give their view on their importance, several responses
gave details on rules in place in the various Member States. Annex 6 focuses on this
information, complementing the information received from a similar questionnaire sent to
Member States.
1. COVERAGE AND REPRESENTATIVENESS OF THE CONSULTATION REPLIES
62 responses were submitted to the public consultation. However, some responses focused on
the second part related to collateral enhancement and did not provide any input to the part on
NPL secondary markets. Among the particularities were that several subsidiaries of one group
sent submission, which were similar and consistent, but not identical. These were counted as
one reply. Some associations sent almost identical replies. Since these represented standpoints
of different institutions, each submission was taken individually. Overall, 51 submissions
contained views about the development of the secondary market for NPLs. 10 of them
declared that their submission should not be made public.
The Commission received replies to the consultation from respondents in 16 countries. Most
submissions came from Germany (10) and Italy (8 of which 3 from citizens). There were also
numerous contributions from the UK (7) and Belgium (6), accountable to the domiciliation of
consultancy and law firms in the former and the seats of European organisations in the latter.
4 contributions came from each Austria and Poland. The only submission from a country
outside the EU was from China.
69
Figure A2.1: Number of respondents by Member State
Since the issue at hand has a single market dimension and since third-county investors have
an important role in NPL markets, it is consistent that many submissions came from
international actors. If international associations, cross-border firms and consultancy firms are
counted as representing supranational interests, 29 submissions (57%) fall into this category
and 22 would represent interests in a particular Member State. Although no submission came
from US investors, those of consultancy and law firms may come close to representing views
from third-country investors.
The type of respondents is mixed. 9 replies came from firms active on the demand side of the
NPL market or associations thereof. Also 10 submissions came from banks or their
associations, i.e. representing the supply side view of the NPL market. 8 submissions were
received from other financial associations and 7 from law or consultancy firms. 6 public
authorities replied and 5 citizens. The remaining submissions are attributable to social
partners, consumer organisations and one SME.
70
Figure A2.2: Replies to the consultation by type of stakeholder
Submissions differed in character and granularity. Some replied directly to the questions,
some added reasoning. The numbers and indications of frequency below relate to those replies
where either a direct response was given or Commission staff was able to derive it directly
from the text. In those cases, where this was not possible, the reply was not counted for the
determination of relative weight of responses. While some responses could not be used to
determine support or not for a specific question, the reasoning and background provided
entered nevertheless into the qualitative assessment done in other parts of this impact
assessment.
Given the small number of responses and their non-representativeness, all numbers can be
taken as a tendency only. If it was possible to trace back differences in responses to
characteristics of the stakeholders, this is indicated below.
2. THE ROLE OF NPLS AND NPL MARKETS
The dominant majority of the replies affirms that the current size, liquidity and structure of
secondary markets for NPL in the EU are an obstacle to the management and resolution of
NPLs in the EU. Some even describe this obstacle as significant. It is, however, notable that
13 submissions (25%) disagree and among them are some firms active in the market or their
associations. Some argue that markets work efficiently at national level, others that the market
will develop.
Question 1: Would you consider the current size, liquidity and structure of secondary markets
for NPL in the EU an obstacle to the management and resolution of NPLs in the EU?
yes, a significant one yes no No reply
Number of responses 11 10 13 17
in % 21.6 19.6 25.5 33.3
in % of those that replied 32.4 29.4 38.2
71
According to respondents, internal and external factors are relevant for banks to decide
whether loan sales should be a significant part of their strategy to manage NPLs. None of the
responses said that external factors alone are relevant. Among the internal factors, the impact
of NPL sales on banks' capital and provisioning, including tax rules on provisioning, and the
role of supervisors are often mentioned, the administrative costs of internal work out is also
frequently listed. A few replies also refer to reputational risks. Examples for external factors
were given less frequently and often of general nature, suggesting that the existence of an
efficient secondary market and fair prices would be beneficial for banks.
Only few submissions make a point on whether the lack of investors is an obstacle to market
development and among those that do, a slight majority rejects the notion. More specifically,
most submissions from actors on the demand side of the market do not address the specific
issue, while most of those from banks and bank association, representing the supply side
affirm that the lack of investors is an obstacle. Most submissions consider specialisation
advantages and management capacity as the economic benefits of non-bank investors,
followed in frequency by non-bank's general contribution to help offloading their high NPL
level. Occasionally, it was also said that the involvement of non-bank investors could improve
the recovery value of NPLs or that benefits are due to non-bank investors longer time horizon.
3. MEASURES TARGETING NPL INVESTORS
As regards obstacles for investors to enter the market, data and information issues are by far
the most frequent reply. Second ranked are non-financial factors, often specified as taxation or
IT issues, closely followed in terms of frequency by legal conditions/insolvency law and
banks' behaviour. Some replies also indicate other financial factors as obstacles and give as
example the link of NPL to securitisation markets.
Several stakeholders also list risks and concerns from the involvement of non-bank investors.
These concerns are diverse and cluster around the issues of reputational risks and consumer
protection, a possible information disadvantage over banks including as regards local
knowledge, a shift of losses from the regulated banking sector to unregulated entities, the
impact of investors' short time horizons and high return requirements in the non-bank
financial sphere.
The frequency with which main benefits and risks of NPL markets were indicated can be
taken as approximation of their importance. The benefits most frequently listed relate to scale
and liquidity on a deep and large market, and to specialisation gains. As regards risks,
consumer/debtor protection and data protection and privacy are very frequently indicated; less
often did respondents see risks from moral hazard. There are also several references to the
equal treatment of investors and the efficiency of the legal framework, which do not fall into a
risk/benefit categorisation.
For a clear majority of those respondents that give a view, differences in national rules
pertaining to NPL sales are an obstacle to the development of NPL markets. This view is
shared among firms active on the demand side of the market and other stakeholders. The
opposite view is held by 37% of those respondents that reply to this question. Those that give
72
reasoning argue that either there are no significant obstacles or that the different legislative
frameworks or economic developments justify the differences.
Question 9: Are national differences justified?
yes yes with
reasoning
no no with
reasoning
No reply
Number of responses 7 13 11 3 17
in % 13.7 25.5 21.6 5.9 33.3
in % of those that replied 20.6 38.2 32.4 8.8
Question 10: Are national differences an obstacle?
yes yes, with
reasoning
no no, with
reasoning
No reply
Number of responses 7 10 5 5 24
in % 13.7 19.6 9.8 9.8 47.1
in % of those that replied 25.9 37.0 18.5 18.5
As regards the nature of obstacles for cross-border activity, the dominant number of responses
refers to the legal framework, insolvency rules and local habits. Much fewer respondents
regard data issues or incentive problems as underlying drivers. When asked whether
differences in these benefits and risks across Member States justify national differences in the
framework for the secondary markets for loans, the majority agrees. Among those that
consider national rules an obstacle, 40% finds them justified while 60% do not.
Some stakeholders hold necessary additional rules to safeguard consumer/debtor protection
while others that think current rules are existent and should be maintained. The number of
both views is broadly equal. A non-negligible number advocates specific rules for banks, non-
bank investors and debt collection firms. Statements on the need to improve or maintain data
protection level are not frequent, but generally affirmative.
Question 14: Do you consider that an EU regulatory framework (Directive or Regulation)
regulating certain aspects of the transfer of loans would be useful?
no yes conditional yes No reply
Number of responses 11 15 11 14
in % 21.6 29.4 21.6 27.5
in % of those that replied 29.7 40.5 29.7
While a majority supports an EU framework for NPLs, the minority share is sizeable and it is
not possible to attribute a specific characteristic to this minority. For example, while the few
individual firms on the demand side of the market are supportive to an EU framework, three
associations related to demand side of the market are not. Banks and their associations,
representing the supply side of the NPL market are also split. The dissenting minority consists
of national actors and those with a supranational perspective. While most dissenting
respondents are located in a Member State with a low NPL ratio, some respondents from
these Member States supported an EU framework. It is also notable that among those that
support an NPL framework at EU level, some make this conditional on a good design that is
73
not overburdening the market players, takes local determinants appropriately into account and
is targeted to obstacles and disincentives.
The consultation replies reveal a broad range of issues an EU framework for NPL sales should
cover. In order of frequency in which issues were mentioned: The link of such a framework to
insolvency law and debtor protection is very frequently flagged. Several responses advocate
measures to standardise the legal process of loan transfers. Some submissions propose
measures to facilitate data transfer and data management. The request for licensing of NPL
sellers appears in the replies at comparable frequency. A few replies also make a link to
taxation and banks' capital requirements.
4. THE ECONOMIC FUNCTION OF LOAN SERVICERS
Many respondents recognise advantages from the use of third-party loan servicers and
considers them as important for the functioning of NPL markets. The dissenting minority
refers to a lack of evidence and argues that internal work out in banks can be as effective as
the outsourcing to loan servicing firms.
Respondents to the consultation see the role of loan servicers largely in managing NPLs, some
consider they manage both performing and non-performing loans, and very few also attribute
a role to them in securitisation and specialisation in real-estate loans. Many describe as
valuable their services linked to monitoring, evaluation and information. Very few make a
similar point with respect to other objectives such as the accomplishment of lower costs of the
management or a higher recovery value of the NPLs.
Question 16: What are the advantages of having access to third-party loan servicers in terms of
secondary loan market efficiency?
yes,there are advantages. 20
loan servicers, debt collection important for NPL market/investors 17
advantages from specialisation 19
advantages from scale effects 10
other 8
no advantages 5
Almost all stakeholders that see advantages flag benefits from specialisation. Some
submissions argue that benefits derive also from scale effects, local expertise and expertise in
collateral management or help with restructuring debt. A few argue that loan servicers can
help NPL investors in their bargaining process with banks, while a few others argue that the
realisation of advantage is depending on the nature of the outsourcing firm. Points made in
this respect by some respondents are that outsourcing to third-party loan servicers creates new
risks, potential conflicts of interests and impacts the reputation of the outsourcing firm. The
impact of outsourcing on debtor and data protection is also regularly listed in this context.
Stakeholders' views are almost equally divided on whether there are obstacles for banks or
non-bank investors to access third-party loan servicers or not. Several responses affirm that
country-differences matter. One respondent remarks that absence of loan servicers would
have no impact on NPL transactions taking place. Another one sees advantages from
74
ownership of loan servicers, while a third considers it a disadvantage if loan servicers were
owned by competitors on the NPL market.
As regards the impact on the ultimate debtor of an involvement of third-party loan servicers, a
clear majority considers that it represents a challenge to existing debtor protection rights.
While those that see no risk for debtors or consider existing rules as sufficient are a minority,
some of them make the case that the obligations of the debtor do not change if a loan servicer
becomes involved. Others explicitly refer to the reputation of loan servicers as a challenging
factor.
5. POLICY MEASURES TARGETING LOAN SERVICERS
A clear majority considers differences in business practices in loan servicing as significant.
Views are almost equally split on whether the differences are justified or caused by financial
regulation. Among those that do not consider them significant are also firms active in the
market and one respondent argues that market entry of international firms has led to a
convergence of industry practices regardless of the local market. As regards activity in several
jurisdictions, relevant differences are seen as caused by legal tradition and consumer
protection rules. Several respondents flag the difficulty and costs to learn and adjust to local
conditions and some stress also the relevance of differences in licensing rules in this respect.
A substantial majority of responses indicates that it would be warranted to remove these
obstacles and that this would have a positive impact on NPL markets. The few dissenting
comments argue that consumer legislation requires differences across Member States to be
maintained or that it could have a harmful impact on lending markets.
Question 23: Do you consider that a EU regulatory framework (Directive or
Regulation) regulating third-party loan servicers would be useful?
no yes no reply
Number of responses 7 28 16
in % 13.7 54.9 31.4
in % of those that replied 20 80
A substantial majority supports an EU framework for loan servicers. Only a small minority
either objects or abstains and among them also respondents active in the market or
representing interest of market participants. Almost all respondents that support an EU
framework advocate it should cover a licensing regime and about half of them propose it
regulates the supervision of loan servicers. Several also advocate measures to access data and
improve data transparency. Many mention taxation, debtor protection and insolvency law as
framework conditions which, if harmonised, would also improve conditions for international
loan servicing firms. A few responses say that market standards and simplification should be
covered. Single stakeholders also add as warranted coverage of loan servicers' remuneration
structures, qualification requirements for their managers and staff, respect for local rules, debt
collection guidelines and suspension rules.
If yes, what should such legal framework include
(multiple replies possible)
75
supervision of
entities
licensing
rules
simplification
and
standardisation
other No reply
Number of responses 13 27 5 10 21
in % 17.1 35.5 6.6 13.2 27.6
Question 28: What specific aspects could be improved, in order to facilitate existing cross-border activities
and/or entry into new markets?
Number of
responses in %
Licensing, regulation and supervision of loan servicers 18 58.1
Access to data, transparency 14 45.2
Debtor protection 5 16.1
Insolvency law, bankruptcy procedures 9 29.0
Market standards 5 16.1
Taxation 13 41.9
Measures that target banks 2 6.5
Number of respondents to this question 31 60.8% of total
76
ANNEX 3: WHO IS AFFECTED AND HOW?
1. PRACTICAL IMPLICATIONS OF THE INITIATIVE
Investment funds and investment firms that intend to purchase NPLs from banks should
face reduced costs in getting authorisation if needed and lower compliance costs when buying
NPL from banks in different EU jurisdictions. This is particularly the case for the smaller
funds and investment funds where compliance costs are disproportionately larger. Investors
would also benefit from availability of more loan servicers and lower costs of outsourcing the
management to NPLs to loan servicers caused by higher competition on the loan servicing
market. Higher competition among NPL investors should lead to declining profit margins in
this industry.
Loan servicers, debt collection firms and financial firms considering to enter this
business line should face reduced costs in getting authorisation and lower compliance costs
when managing NPLs outsourced from NPL investors to them. Firms acting in different
jurisdictions would benefit particularly from the passport, which eliminates to request
authorisation in each jurisdiction. Tapping markets in different jurisdictions allows them to
realise scale economies. More competition among loan servicers and scale economies should
lead to declining fees for loan servicing. Average size and market concentration is expected to
rise while profit margins should decline in the medium term as the result of more contestable
loan servicing markets.
Banks would face a larger investment base and the more intense competition among investors
would lead to higher bid prices for NPLs. This increases their profits respectively reduces the
loss they would derive from selling NPL portfolios to non-banks. Banks located in Member
States with hitherto high entry barriers for NPL investors and a small investor base would
benefit over-proportionally. Smaller banks would have proportionally larger benefits because
the larger the investor base, the smaller the size of the average investor and the smaller the
investor the more likely it is that they bid for smaller NPL portfolios held in smaller banks.
Institutional investors such as insurance companies or pension funds are unlikely to be
enticed to enter NPL markets. They are offered a greater range of attractive investment
opportunities in investment funds that buy NPLs as a result of the initiative.
Third country firms would face lower entry costs from licensing if they buy NPLs from EU
banks or provide loan servicing to NPL investors. The passport offers them to conduct
business in all EU Member States.
Consultancy firms and law firms may see part of their business and profit opportunities
erode since potential market entrance will require fewer services and legal advice from them
in an environment of less burdensome and more harmonised entry and business conditions.
Debtors should in the first place not be affected because their obligation to pay back their
debt and interest is independent from whether the NPL is held by a bank or transferred to a
non-bank. However, they may face welfare losses from uncertainty because facing a
counterpart they had not chosen and do not know, especially if the counterpart is authorised in
77
a different Member State. While they know the conduct of banks from past relationships, they
have less certainty about how the new creditor or loan servicer will behave. Debtors may see a
loss in value of their customer relationship with their bank if the bank decides to sell its loan
to a non-bank. This could in turn increase the incentive of the debtor to avoid the loan
becoming non-performing. There is also a possibility that if NPL markets are established,
debtors attribute a smaller value to their customer relationship with their bank. This may have
an impact on their selection of banks and conceivably also on their willingness to take a bank
credit.
The potential impact on highly indebted households is hard to foresee as it will depend on
the behaviour of loan servicers. If the latter help indebted social groups more than banks to
arrive at a more suitable payback profile of their loans, debtors may benefit. The opposite is
possible if loan servicers apply existing debtor protection rights in a stricter way than banks.
The enhanced environment for banks to offload NPLs from their balance sheets through loan
sales should be positive for SMEs since it will create room for banks to expand lending to
viable companies. Similar the impact on highly indebted households, the impact on highly
indebted SMES will depend on the behaviour of loan servicers. If the latter help them more
than banks to arrive at a more suitable payback profile of their loans, they may benefit. The
opposite is possible if loan servicers apply existing debtor protection rights in a stricter way
than banks.
The public sector benefits from lower NPL on banks' balance sheets. This reduces the fiscal
costs of a banking crisis. It also reduced the costs of banking supervision because one critical
element of supervision becomes less sizeable. The targeted reduction of compliance costs
could reduce administrative burden for the public sector. Some Member States may face
rising demand for authorisation from third-country firms that intend to make use of the
passport, but may need to be authorised by the supervisor in one Member State for doing so.
Unless the fees charged for authorisation and supervision contain an implicit subsidy for the
applicant, the impact should be budget neutral even in those Member States facing an increase
in requests. If Member States see their preferred state of debtor protection eroded through the
EU framework for NPL investors and loan servicers, they would warrant to complement the
policy options at EU level through policy measures at national level in a way that keeps their
preferences in place whilst help develop the NPL secondary market.
78
2. SUMMARY OF COSTS AND BENEFITS
The heterogeneity of the conditions for market entry among Member States, as well as
national supervisory requirements related to the size and legal form of any market participant
considering to buy NPLs, complicate to a great extent the quantification of the benefits of
changes to regulatory standards. Since most investors are hedge funds or private equity
investors, regulatory fees in the asset management industry seem useful to serve as
comparison term. If a NPL investor can operate under the regulatory regime of an investment
fund, the regulatory start-up costs would range between about EUR 10,000 to about EUR
15,000.94
A Commission study suggests that direct regulatory fees could amount to less than
20% and about 40% of the regulatory start up costs might be attributable to compliance costs
in terms of labour costs and to pay external servicers for local facilities in the host country. 95
Annual ongoing costs, for supervision, were estimated at about the same amount. Since
market sources interviewed by the Commission assessed the average of total costs to enter a
new NPL market at about EUR 60,000 to 100,000, compliance costs are deemed not
particularly high in relation with total entry costs incurred by investment firms.
Table A.3.1: Compliance costs of cross-border asset management firms
Note: Scenario A describes an asset management company relying on in-house legal advice and in-house fund
administration, whereas Scenario B shows an asset management company outsourcing legal advice and fund
administration to third parties.
Source: European Commission 2017.
Loan servicers are subject to costs for licensing in most Member States, with requirements
and compliance costs differing across Member States. The NPL report of the ESRB (2017)
94
European Commission (2017), Impact Assessment: Initiative cross-border distribution of investment funds.
95
European Commission (2017), Impact Assessment: Initiative cross-border distribution of investment funds.
79
refers to market entry costs ranking up to about EUR 5 to 15 million, but does not specify the
share of licensing costs or country differences. Market sources having replied to European
Commission's inquiries indicate that licensing fees vary strongly across Member States and
differences across firms in the same country suggest that both firm- and country specific
factors matter.
From a very limited sample of replies, it became evident that actual one-off fees for the
licensing vary from a few hundred euro (in several Member States such as Finland, Ireland,
Sweden) to more than EUR 50,000 (for example in Czech Republic and Italy). Annual
licencing fees range significantly as well, from a few hundred euro per annum to about 34,000
annual fees (for supervision of loan servicers charged in IE). Compliance costs for data
reporting could add to these set-up and licencing fees the costs to comply with anti-money
laundering rules, that may prove significant.
While fees for a banking license may not be particularly high, especially in those Member
States that do not require a full banking license, a banking license carries additional
compliance costs in terms of direct labour costs, necessary to ensure compliance with all rules
applicable to credit institutions, including capital costs to fulfil minimum capital
requirements.96
In the absence of available examples for EU banking sectors, Dahl et al.
(2016) in a US study on compliance costs found that small banks paid USD 100,000 to USD
170,000 for personnel expenses and USD 64,000 - 90,000 for other costs linked to
compliance.97
According to market sources, some Member States' supervisory framework (for example
Hungary and Romania) require a set-up social capital for loan servicers amounting to EUR
500,000 for NPLs acquisition and debt collection firms, respectively. Greece requires loan
servicers to maintain capital of EUR 100,000. With a standard estimate of 10% costs for
equity, this would translate into up to EUR 10-50,000 additional capital costs per annum if a
banking license is required. Absolute amounts will be different for each individual case, also
depending on the share of capital without a banking license. Similar considerations apply if
NPL investors are required to set up a securitisation vehicle or investment fund structure and
this needs to be supported with capital.
Cost structures relating to compliance depend strongly on the applicable legislation and type
of firm. A 2009 study by Europe Economics98
based its analysis of compliance costs
96
Even in off-shore jurisdictions, setting up a credit institution would imply costs between $150,000 to
$250,000, on top of more than $1 million in capital. See
https://www.offshorecompany.com/banking/start-a-bank/your-own/
97
Costs for data processing, legal, accounting, and consulting. The numbers relate to community banks
with total assets up to USD 250 million. See Dahl, Meyer, Clark Neely (2016) – NAME OF PAPER.
98
Europe Economics, 2009, "Study on the Cost of Compliance with Selected FSAP Measures", available on:
http://ec.europa.eu/internal_market/finances/docs/actionplan/index/090707_cost_of_compliance_en.pdf
80
emerging from various EU Directives on extensive interviews with the financial industry. The
results for the asset management industry are shown in the tables below. The one-off costs are
not fully comparable to licensing costs since they relate to the investment costs of existing
firms to comply with new regulation and not of new firms to comply with existing legislation.
They may nevertheless be indicative of the types of costs involved.
Table A.3.2 The drivers of one-off compliance costs in the asset management industry by Directive
Note: FCD := Financial Conglomerate Directive, CRD := Capital Requirements Directive, MiFID := Markets in
Financial Instruments Directive, 3AMLD := Third Anti-Money Laundering Directive
Source: Europe Economics 2009
Table A.3.3 The drivers of ongoing compliance costs in the asset management industry by Directive
Note: FCD := Financial Conglomerate Directive, CRD := Capital Requirements Directive, MiFID := Markets in
Financial Instruments Directive, 3AMLD := Third Anti-Money Laundering Directive
Source: Europe Economics 2009
Ongoing supervisory fees for banks depend, in the euro area, on the size of the bank and its
risk exposure, by means of a fixed and a variable component. By means of example, a non-
systemic bank with total assets of EUR 1.6 billion and risk exposure of EUR 700 million
would have to pay a fee to the SSM of about 10,000 in 2017. In the chosen example, about a
tenth of it is due to the fixed component.99
A recent study by Dahl et al (2016) decomposes the compliance costs of smaller US banks by
cost type and size of bank. It demonstrates the importance of personnel expenses as well as
strong scale economies underlying costs for personnel and data processing. Also the share of
costs for accounting and consultancy decline with firm size.
99
https://www.bankingsupervision.europa.eu/organisation/fees/calculator/html/index.en.html
81
Table A.3.4: Compliance costs in small US banks
Cases of actual licensing costs are only available in form of anecdotal evidence. A market
source indicated costs of EUR 60-100,000 to enter a market of which less then EUR 10,000
are caused to obtain a license as NPL investor. Market sources indicated a banking licenses in
82
a Nordic country requires a guarantee depending on the turnover. It would amount to around
EUR 500,000. A German bank founder reported to a newspaper costs of EUR 700,000 to
EUR 800,000 to obtain a banking license in Germany.100
Other online sources suggest that
starting an offshore bank demands between $150,000 to $250,000 and requires $1 million in
capital, depending on the jurisdiction. For founding a bank in the USA, the amounts would be
four times as high.101
Cost savings would be very different across Member States depending on their licensing
regime, which sometimes entails only a partial banking license. The table below categorises
the examples given in the text below. Given the anecdotal character of some, their country-
specific nature and different sources, they are not comparable.
Table A.3.5: Overview of administrative costs by type of financial institution
Asset management NPL investors loan
servicers
banking license
total costs 19,000-25,000 60- 100,000 50,000-15
million
USD 150,000-
1,000,000
licensing costs 2000 10,000 6,000-80,000 500-800,000
annual fees for
supervision
2000 34,000 10,000
labour costs, costs of
outsourcing
5-15,000
domicilation 5,000
Note: all numbers in EUR unless otherwise indicated.
Box A.3: Cost savings potential from relaxed entry requirements
The actual cost savings by potential market entrants depend on the Member State concerned and more
importantly on firm specific factors.
 In Member States where a licence is required for NPL investors, a different set of documents
is often required and the exact requirements upon applicants and bureaucratic procedures vary,
resulting in administrative costs and administrative delays (see Annex 6).
 Potential cost savings linked to lower fees for licensing and supervision seem to be less
sizeable than labour costs and costs for legal advice and consultancy. In the related branch of
the asset management industry, these administrative costs are at least twice as high as
regulatory fees.
100
https://www.welt.de/finanzen/article138894620/Das-aberwitzige-Abenteuer-eine-Bank-zu-gruenden.html
101
https://www.offshorecompany.com/banking/start-a-bank/your-own/
83
 An important firm-specific factor is the size of the firm. Compliance costs rise under-
proportionally with size, partially thanks to scale economies in processing data and to the
fixed cost nature of consultancy costs.102
 Costs savings related to the fact of not requiring a banking license depend on both Member
States' capital requirements and firms' optimal capital position. Member States differ in how
much capital they require from a firm that buys NPLs or acts as loan servicer.103
Notwithstanding the statutory capital requirement, many NPL investors and loan servicers
voluntarily hold equity as capital. There are also NPL investors that voluntarily hold a banking
license since it gives them the advantage of using the EU passport for expanding business to
other EU jurisdictions.
The Table below translates the scarce information about costs that NPL investors and loan
servicers entail if they expand activity into estimates of potential cost savings if any of the
preferred option is implemented. Given the poor data quality, the numbers should only be
seen as indicative. They will be very different in dependence of the individual firm. The
numbers only cover regulatory charges. Labour costs and legal fees would multiply the
amount.
I. Overview of Benefits (total for all provisions)
Description possible cost saving
per firm in EUR
Comments
Direct benefits
Lower entry costs for investors for NPL
purchases in some Member States
500,000 if banking
license was required
previously
All options remove the need to request a banking license
or set up a local entity for NPL investors
Lower costs for NPL investors to hold
NPLs
50,000 All options remove the need to set up a securitisation
vehicle or investment fund structure for NPL investors
Lower entry costs for EU loan servicers 500,000 if banking
license was required
previously
If the EU rule removes the need to request a banking
license or set up a local entity.
Lower supervisory fees for EU loan
servicers
10,000- 30,000 If the EU rule removes the need to be supervised in each
Member State.
Lower costs for EU loan servicers to
expand activity to other EU markets
6,000 -80,000 per
market
If no further authorisation necessary to enter markets in
other EU Member States. If the EU rule removes legal
uncertainty from the absence of a uniform definition of
loan servicing
Lower entry costs for third-party loan
servicers
75,000 They can select one entry point to the EU market in
accordance to their needs.
Larger choice for NPL investors to select
loan servicers and lower costs for loan
#NA The constraint from a limited number of local loan
servicers is lifted. Loan servicers become more efficient
102
See the example of cost structures for compliance of smaller banks in the USA in the Table above.
103
Hungary and Romania request capital amounting to EUR 500,000 for both NPL acquisition and debt
collection firms.
84
servicing through competitive pressure and scale economies.
Indirect benefits
higher bid prices for NPL portfolios #NA results from higher competition on NPL markets
larger transaction volume in NPLs #NA consequence of a larger investor base
Banks lower cost of NPL management #NA from the possibility to outsource to more efficient loan
servicers
Banks to increase lending to the economy #NA As a result of fewer NPLs on their balance sheet
lower costs to securitisation with loans as
underlying assets
#NA As consequence of lower costs of loan servicing that spill
over to the costs that securitisation vehicles will have to
pay
lower risk to financial stability #NA from sounder banks with lower NPL ratios and reinforced
consolidation in the banking sector
The required re-writing of law and its implementation will entail one-off costs at EU and
national level, especially for Member States that used to ensure debtor protection through the
authorisation and supervision of NPL investors and would need to implement new laws that
uphold the desired level of debtor protection through other means. Costs of writing new
legislation are substantial. Using data from New Zealand, Wilson et al. (2012) estimate costs
of a new law to amount to USD 2.6 million USD and that of a regulation at about USD 400.
They refer to a similar study that point at costs in the US amounting to less than USD 1
million, but find that this study is likely to underestimate costs. As negative outcome, one can
assume that each EU Member State finds it necessary to adjust existing legislation and
encounter costs as high as those found in the study from New Zealand. This would be broadly
EUR 60 million104
and may represent an upper bound because not all Member States would
need to adjust national law and for those that do, it will concern most of the time adjustment
of existing law rather than completely new law.
Some Member States may face rising demand or authorisation and licensing from NPL
investors and/or loan servicers, which would imply higher administrative costs. Standard
practice is that the public sector charges a fee for the licensing process and supervision that
fully covers these costs. Recent work by the Commission services on the licensing of
investment funds and crowdfunding (see corresponding impact assessments) identified
licensing costs in the range EUR 5,000 to 10,000. One Member State calculates costs of
supervision of a loan servicer at EUR 34,000. Given that supervision of loan servicers might
be more expensive if the entity acts in different Member States, it would be reasonable to
assume that costs increase up to EUR 50,000 p.a.. NPL investors may face lower supervisory
costs if they use an EU supervised loan servicers. These costs could apply to each new
entrant, but would need to be seen in conjunction with cost savings from a single point of
104
2,6 million times 28 Member States adjusted with an USD/EUR exchange rate of 1.2
85
entry rather than requiring to bear the costs for each Member State the entity wants to be
active in.
II. Overview of costs
Citizens/Consumers/Business NPL investors and loan servicers
(per firm)
Public Administrations
One-off Recurrent One-off Recurrent One-off Recurrent
Direct costs
none none for license EUR
5,000-10,000
for supervision
EUR 10-50,000
creation of
new
legislation
EUR 60
million
supervision of
more NPL
investors and
loan servicers
Indirect costs none none legal advice and
labour costs
#/N/A
maintaining It
systems and
storage of data
#N/A
none none
All policy options are expected to lead to compliance costs as regards the implementation of
the new law, the relevant formalities and training for NPL investors and for loan servicers.
Significant compliance costs are expected in particular when it comes to audit and
management, monitoring, supervisory and licensing fees.
While the establishment of principles or rules at EU level would entail compliance costs, NPL
investors and loan servicers would no longer be exposed to the costs of compliance to national
rules. Overall, the EU compliance costs should be lower than the average compliance costs
across EU Member States. Especially NPL investors and loan servicers operating in several
EU Member States should benefit from lower compliance costs.
Given the fact that national rules for loan servicers are generally tighter as compared to
national rules for NPL investors, compliance with common rules is likely to trigger higher
costs for loan servicers as compared to NPL investors. Citizens/consumers are not expected to
bear direct costs. Banks wishing to sell NPLs may be exposed to indirect costs resulting from
the regulatory change if these affect the price bids of NPL investors.
In both groups of market players (i.e. NPL investors and loans servicers), the cost of
complying with the regulatory change is expected to be greater for small players as compared
to bigger players as those costs constitute a greater share in revenues. In the case of small
NPL investors, this initial cost may be compensated over long term with greater revenues
linked to expanded activity across country borders. The described compensation is less likely
for loan servicers, whose operations are characterised by economies of scale. Consequently,
the loan servicing sector is expected to consolidate following the regulatory change, with
potentially negative effects for small businesses but with efficiency gains at an aggregate
level.
Over longer term, i.e. once market participants have adjusted to the regulatory change, cost
savings are expected for the industry on activities such as application for a licence, calculation
86
of regulatory fees, regulatory reporting, marketing. A further beneficial impact on costs is
expected thanks to a lesser need for legal advice due to harmonisation and transparency of
rules..
For market participants based outside the EU in particular, NPL investors and for loan
servicers are expected to benefit not only from lower regulatory fees but also the potential
search and legal counsel costs, facilitating access to EU markets.
From consumer perspective, the obligation to respect national rules for privacy, data and
debtor protection for loan servicers is key to ensure an adequate and predictable level of
consumer protection in all EU countries.
87
ANNEX 4: ANALYTICAL METHODS
1. A STYLISED VIEW ON DEMAND AND SUPPLY OF THE NPL MARKET
The first part of this annex presents a conceptual framework to analyse the potential impact of
policy measures on the demand for and supply of non-performing loans on secondary
markets. To put the initiative analysed in this text into perspective, the appendix gives a
schematic overview of the different NPL initiatives and of the specific failures they address,
such as shortage of supply, lack of demand, information costs, valuation.
The presented framework is theoretical as data availability does not allow a derivation of full
quantitative properties of demand, supply and of the market equilibrium. A further
complication arises from the fact that non-performing loans are not a homogenous good,
which is evidenced by different prices for secured (largely by real estate) and non-secured
(largely consumer loans).105
Finally, the structure of the NPL market is that of an oligopsony,
with few large buyers conducting a small number of transactions.106
Notwithstanding the
mentioned difficulties, it seems possible to derive stylised characteristics of the NPL demand
and supply function based on the incentives that investors (the demand side) and banks (the
supply side) face.
The proposed framework considers a simplified model of the NPL market with a portfolio
consisting of a large number of homogenous loans. Looking at the supply side, the higher the
market price relative to the nominal value (the gross book value), the higher the volume of
NPLs proposed for sale. One can also assume a price floor below which banks will not offer
any NPLs. Determinants of this floor could be: i) a (non-negative) expected recovery value on
the loan portfolio, and ii) the desire by a bank not to realise capital losses, which may arise if
the market price is too much below the expected recovery value. Even if the debtor does not
pay back his loan, the bank may anticipate that he pays back part of the loan and may
therefore wish to keep the loan on its books. Banks may also refuse to sell NPLs if they
esteem the customer relationship and hope for ongoing business with the debtor, which could
become profitable again.107
The mentioned mechanism may result in a price ceiling.
Moreover, the offer price may reflect potential reputational costs for a bank linked to NPL
sales and their negative impact on long-term relationships with its clients. Finally, strategic
considerations may also determine the offer price. For example, the bank may anticipate that
the bidder will try to exploit its weak bargaining position if it has a large pile of NPLs on its
105
Prices for secured (largely by real estate) and non-secured (largely consumer loans) are very different.
Italian buyer BancaIFIS (2017) shows divergent price trends for secured and unsecured NPL
transactions in Italy.
106
See Fell (2017).
107
Banks will have to decide when to keep the NPL on their books depending on the difference between
the market price and the book value of a non-performing loan
88
balance sheet. Therefore, the bank may strategically decide to enter negotiations with a
somewhat inflated offer price.
In the chart below we assume that at a market price equalling the nominal value banks will
offer 70% of NPLs for sale (i.e. keep 30% of the NPLs on their loan book). We also assume
that banks will not supply any NPLs to the market at a market price equal or lower less than
20% of the nominal value.
Figure A.4.1: A stylised perspective on demand for and supply of NPLs
Looking at the demand side, potential investors are expected not to offer a price much below
the highest recovery value of the NPLs offered because it would be refused by banks.
Although investors' expectations on recovery values may differ from related expectations by
banks, the discrepancy may not be too significant. At the same time, investors are likely to
demand a price that covers their costs of administering the NPLs, which may justify the
discount as compared to the recovery value. NPL investors are also likely to request an add-
on that reflects funding costs and/or their internal requested rate of return. Both seem to be
higher for non-banks than for banks.
For a zero market price, demand for NPLs is expected to amount to the entire loan book as
investors are willing to take the total loan book if it is for free. As to the shape of the demand
curve, the relationship between price and demanded volumes is expected to be non-linear for
strategic reasons. For smaller shares of NPLs offered, the investor may anticipate a lemon
issue: the counterpart could offer NPLs with the weakest recovery value and keep the higher
quality NPLs on the balance sheet. The described mechanism could in the extreme case lead
to a demand curve which is backward bending in parts, i.e. demand declines when prices
89
decline.108
While it is not possible to identify the range in which the demand curve is
backward bending, one can at least assume that the demand curve is steeper (i.e. more elastic
to changes in prices) for lower volumes of NPLs. The larger the share of NPLs sold, the less
relevant the lemon issue. For larger shares of NPLs offered, non-linearity may occur due to
efficiency gains in loan administration, for example by realising scale effects in loan servicing
and debt collection.
NPL transactions are done with consultants, which charge a price for their services. The
added value of the consultancy services is to match demand and supply, which is not trivial
given the opacity of the market, the underlying lemon issue and the bilateral bargaining
position of both the buyer and the seller, requiring a tailor-made contract that encompasses all
information and incentive asymmetries. These transaction costs are reflected in a bid-ask
spread, which can be charged either on the selling banks or on the buying investors. The chart
above assumes that the transaction costs increase the costs for investors proportional to the
price and move the demand curve northwards.
Both the demand and the supply curve may be affected by policy options listed in the NPL
action plan. More efficient insolvency frameworks would increase the recovery value of
NPLs, thereby shifting both demand and supply upwards. Market prices would increase, but
the effect on volumes is uncertain, depending on whether banks or non-bank debt collectors
could benefit more from the improved insolvency framework. Another element potentially
leading to a changed market outcome is supervisory pressure on banks to disclose NPLs
and/or to off-load them from their balance sheet. If banks face stronger incentives to provision
NPLs, the book value declines relative to the nominal value, which reduces the gap to the
market price. The mentioned supervisory pressure has the potential to shift the supply curve
downwards, thereby decreasing prices and increasing volumes. An establishment of AMCs
could have a similar effect as it would incentivise banks to supply more NPLs if transactions
are arranged by a third-party with possibly larger bargaining power and smaller stigma
effects. The direct consequence could also be lower transaction costs if the AMC economises
on some of the activity that consultants are undertaking.
On the investor side, the existence of an AMC on the market would likely lower search costs
but it could strengthen the bargaining position of their counterpart (i.e. the bank selling
NPLs). AMCs and information platforms could also reduce transaction costs by providing
impartial information to potential buyers, i.e. facilitating due diligence and reducing
information asymmetries between the initial creditor and potential buyer of the debt contract.
If the transaction costs are ultimately paid by the investor, the involvement of AMCs and
information platforms will move the demand curve upwards, i.e. closer to the curve without
transaction costs. More efficient securitisation markets would be largely to the benefit of
108
This is depicted in a chart in the ECB Financial Stability report December 2016, p. 129. See also Fell
(2017).
90
lower funding costs for NPL transactions, which could move the demand curve upwards as
investors could afford to pay a higher price for NPLs.
Lowering market entry conditions for investors into the secondary market for NPLs would
shift the demand curve to the right, but the impact on the reservation price is unclear as it is
uncertain whether new entrants would be able to realise higher recovery values. Both
recurrent and one-off costs may constitute market entry barriers as they affect the result of a
cost-benefit analysis undertaken by a potential entrant. As to one-off costs, they cannot be
recovered if the firm is not able to do successful business (so-called sunk costs) and they
include: obtaining authorisation and licenses, investments to become eligible for national
conditions, search for loan servicer. Examples of recurrent costs include: debt collection,
collateral use, compliance to conduct rules.
91
Figure A. 4.2: An economic perspective on different policies to tackle NPLs in EU banks
92
2. CROSS COUNTRY ANALYSIS
This part derives insights from the cross-country variation in selected NPL data. The
comparison covers the EU Member States. For some exercises, data was not avaialable
for all EU Member States and in some comparisons it turns out that the UK observations
were outliers. In some of the latter cases, the observations for the UK were not
considered. Overall, the quality of the data basis is weak. Despite the weak data quality,
most of the found correlation look plausible and evidence of a systematic bias in the data
that would distort the results could not be detected. This said, the resulting numbers
should be best understood as illustrative only as they do not stand up to the requirements
of rigorous robustness checks.
The only official statistics available for NPLs are volumes of NPLs on banks' balance
sheets and their ratio to loans and advances on banks' balance sheets collected by EBA
and ECB. Since the coverage of banks is larger in the ECB than in the EBA data file,
ECB data was used for the analysis.
The only source for data on NPL sales are international consultancy firms and they
collect the data from public sources, own business and business contacts. Data collected
and made public by the different consultancy firms is broadly similar, but differs
somewhat, which indicates that the underlying ground work is difficult and there are
limited means to verify data. Issues emerging from data quality are discussed below. For
the analysis in this section, the data of NPL sale by Member State 2015 and 2016
published in PWC (2017) and Deloitte (2017). For ratios, the loan sales data of the year
was combined with the stock of NPLs in the same Member State's banks' balance sheet at
the end of the previous year, i.e. 2016 transactions relative to the stock in 2015Q4.
Even if consultancy firms strive to have a high standard on data collection, they do not
have the means and authority to verify data to the same extent public statistical offices
can. Hence, there may be a bias in the data emerging from the possibility that some loan
sales take place without any notification to the public. Another issue is that the available
data is patchy, i.e. not all data fields are complete. For example, the amount traded is not
disclosed or available in more than 15% of the transactions, in one micro data set the
Commission services were able to check. The consequence is that observations for
Member States with few transactions and a large share of transactions with unknown
amount cannot be used. This led to the decision not to consider the observations for
Belgium in the analysis below.
Another complication for any empirical analysis with this data stems from the
observations that underlying transactions are very different in size and a few very large
transactions will determine observations for some Member States. This may cause
outliers to have a strong impact on descriptive and analytical statistics. Since the largest
transactions are clustered in Member States with a larger number of transactions (UK, IT,
ES, DE, IE), the risk of empirical results being determined by individual loan sales
appears limited.
93
In almost 25% of the transactions, buyer respectively seller are not known. Hence it
cannot be said whether the NPLs were sold or bought by non-banks or other banks. Very
often loan sales combine the sale of non-performing with performing loans. Given the
uncertain sourcing of the data, it may even be possible that some transactions are carried
out with performing loans only. An example that combines several of these two issues is
the sale of a portfolio with a face value of 11.8 billion GBP by UKAR to Prudential and
Blackstone in May 2017.109
The amount is equal to about 10% of the total annual
turnover in 2016. The seller is not a bank, but a public AMC. The underlying 104,000
loans are performing and they had been originated by the bank Bradford and Bingley
before it was put in public ownership in 2008.
While the share of NPLs in the reported loan sales is unknown, three different methods
suggest it could be on average in the range of 70 to 80%.
 A first estimate stems from AFME and is reported in its reply to the public
consultation. According to data from KPMG "74% of the total loans sales
completed between 2015 and 1H 2017 in Europe represented either non-
performing or a mixture of non-performing loans with other risk exposures (i.e.
with performing, subprime, or re-performing loans)."
 A second estimate was conducted by the Commission Services with data from
another consultancy firm shows a share of non-performing loans in loan
transactions of 47% on average 2014-2016. It also reveals that for 34% of the
loan amounts there is no information whether they are performing or non-
performing and in 12% the loan amount was a mixed portfolio, consisting of a
unknown share of performing and no- performing loans. If it is assumed that the
ratio is the same in the unknown and mixed transactions as in the trades with a
known breakdown, the ratio of non-performing loans in all loan trades would be
78%.
 A third method consists in a regression analysis that relates the loan sales in 15
EU Member States to the change in the volume of non-performing loans on
banks' balance sheets (see chart below). The regression line suggests that for 100
billion EUR loan sales, the amount of non-performing loans declines on averge
by 73 billion, i.e. an implied proportion of 73% of non-performing loans in total
loan sales. If the outlying observation of the UK is not considered, the ratio would
increase to 80%.
109
See UKAR's press release of the deal at http://www.ukar.co.uk/media-centre/press-releases/2017/31-03-
2017?page=4.
94
Figure A 4.3 Loan sales and change in NPL volumes across EU Member States
The chart below applies the same methodology, but does not take loan sale and NPL
volumes in EUR, but as a ratio to the stock of NPLs and total loans, respectively. This is
an implicit control for the size of the market and avoids that Member States with large
NPLs have a dominant impact on the correlation. The correlation is insignificant and the
R2 small unless the UK as outlier is excluded from the panel. If the UK observation is
not considered, the regression line suggests that a 1 %-pt increase in the ratio of loan
sales to NPL volumes decreases the NPL ratio by 0.3%-pts.
Figure A 4.4 Loan sales and change in NPL ratios across EU Member States
.
The next chart applies the same methodology, but uses a different data set, namely loan
sales submitted and calculated by AFME on the basis of data collected from KPMG from
public data sources. This data set includes an observation for SE, but misses some EU
Member States (FR, LT). Numbers are broadly comparable with the exception of those
UK
IE
ES
DE
IT
NL
PT
FR
RO
HU
HR
SI
PL
BG
LT
y = -0.7334x - 1.9487
R² = 0.8619
-60
-50
-40
-30
-20
-10
00
10
0 20 40 60 80
Change
in
the
volume
of
NPL
on
banks
balance
sheets
2014Q4
to
2016Q4
in
billion
EUR
Loan sales 2015/16 in billion EUR
95
for UK and HR. Still, the slope coefficient is similar and the share explained by the
regression line somewhat higher, even if the UK is not excluded from the panel.
Figure A 4.5 Loan sales and change in NPL ratios across EU Member States (alternative data source)
A further cross-country comparison shows some correlation between loan sales and the
bid-ask spread derived from the theoretical model presented in Annex 4.3. While the R2
is not particularly high, the correlation is significant at 5% level independent of whether
the UK is included into the sample or not. Though the regression analysis gives no
information about causality, it suggests a 10%-pts decline in the bid-ask spread would be
consistent with an 3.3 to 4.5 %pt increase in loan sales relative to the outstanding NPL
stock. If the initial NPL ratio or the market size are added as additional control variable,
they does not come out significant, and do not change the significance of the bid-ask
spread.
96
Figure A 4.6 Loan sales and bid ask spread across EU Member States
Since for some Member States there is not data about loan sales, it is also interesting to
directly compare the bid-ask spread derived from the model with the change in NPL
ratios. For both data is available for all Member States, bar CZ for which the NPL ratio in
the ECB data set starts only with the observation of 2016Q1. The relationship between
bid-ask spread and the change in the NPL ratio from 2014Q4 to 2016Q4 is not
significant. This, however, changes, if the observations for those Member States, in
which the NPL ratio increased over these two years are excluded from the panel (BG, EL
and PT). Since the reasons for an increase in the NPL ratio are unrelated to the bid-ask
spread that impacts the loan sales, such elimination of single observations from the data
set seems justified. The correlation become significant and suggests Member States with
a lower bid-ask spread were able to realise a relatively larger decline in their banks' NPL
ratio. The slope coefficient suggests a 1 %pt lower bid-ask spread reduces the NPL ratio
by 1.6%.
UK
IE
ES
DE
IT
NL
PT
FR
RO
HU
HR
SI
PL
BG
LT
CZ
y = -0.3278x + 21.71
R² = 0.2367, incl. UK
y = -0.4528x + 22.625
R² = 0.297, excl. UK
0
5
10
15
20
25
30
0 5 10 15 20 25 30 35
Bid-ask
spread
Loan sales (average 2015-16) in % of previous years' NPLs
97
Figure A.4.7 Change in NPL ratio and bid ask spread across EU Member States
The table below shows the numerical results of the different specifications.
Table A4.1 Regression results, cross-country OLS, dependent variables Loan sales (upper panel) and change in NPL
ratio (bottom panel)
Constant
Bid-ask
spread R2 obs.
Transactions in loan sales
Data set 1 23.94 -0.72 0.24 16
t-value 3.65 -2.08
Data set 1 ex UK 21.60 -0.66 0.30 15
t-value 4.04 -2.34
Data set 2 21.43 -0.70 0.27 14
t-value 3.44 -2.09
% Change in NPL ratio
Data set 3
-
38.35 0.89 0.05 27
t-value -2.81 1.20
Data set 3 ex BG, EL and PT
-
57.04 1.65 0.39 24
t-value -7.10 3.79
Note: Bid ask spreads as derived in Annex 4.3. Data set 1 combines observations of loan sales 2015 and 2016 in
PWC (2017) and Deloitte (2017). Data set 2 uses the AFME (2017) calculations with KPMG data of loan sales.
All loan sale data is relative to the ECB data of NPL volumes. Data set 3 uses the change in the ECB's NPL ratio
2014Q4 to 2016Q4 (2015Q1 for those Member States that had no observation for 2014Q4).
There is also a broad correlation between the number of loan servicers active in a
98
Member State and the volume of NPLs. The number of loan servicers is taken from
Table A2 in Annex 5.2. The right-hand panel zooms in on smaller Member States, that
are not clearly visible in the left-hand panel. The comparison suggests that the number of
loan servicers relative to the amount of non-performing loans is small in Italy, France,
and despite numerous authorisations recently in Greece.110
Spain and Portugal are
borderline cases. The UK is also an outlier since it has many loan servicers. This might
be explainable by the role loan servicers have in supporting securitisation activity or the
outsourcing of the management of real estate loans in the UK.
Figure A.4.8 Number of loan servicers and NPL volume across EU Member States
Although the cross-country comparisons produce plausible coefficients, the small
number of observations and the data caveats listed above suggest that the result are best
treated as illustration and not at statistical evidence. Results may not be robust and
change once the analysis is re-run with observations for more countries or additional
years.
110
The first loan servicer was authorised in Greece in July 2017. By December 2017, the Greek
Central Bank authorised 10 firms.
99
3. QUANTIFYING THE IMPACT OF THE DIFFERENT POLICY OPTIONS ON NPL SECONDARY
MARKETS- EXPLANATION AND ASSUMPTIONS
Inefficiencies in the pricing of NPLs show up as relatively wide spreads between the ask
price from the sellers of NPLs and the bid price from buyers. Then, one of the goals of
the difference policy options is to improve NPLs secondary market efficiency helping to
reduce such spread. We observed that a reduction in the bid-ask spread is correlated with
a reduction in the NPL ratio.
Pricing model for the bid-ask spread
We have implemented a theoretical model to calculate the bid ask spread on NPLs for the
EU MS:
We apply the methodology proposed by Ciavoliello, et al (2016) and proceeded as
follows:
1. The future value of a loan that performs and that matures at time n is Fn. This loan has
cash flows (ft) from now until maturity in time n. We use the loan effective rate (i) to
calculate the future value.
𝐹𝑛 = ∑ 𝑓𝑓 ∗ (1 + 𝑖)𝑡
𝑛
𝑡=1
= 100
2. To calculate the present value of a performing loan (Gross Book Value or GBVu) we
discount the future value of the loan (Fn) using the loan effective interest rate (i). Thus:
𝐺𝐵𝑉
𝑢 =
𝐹𝑛
(1 + 𝑖)𝑛
3. If the loan defaults or does not perform (NPL), the owner (bank) of the loan can only
recover a percentage on the GBVu (recovery rate = rr). Then the Gross Book Value of the
defaulted loan (GBVd ) is:
𝐺𝐵𝑉𝑑 = 𝐺𝐵𝑉
𝑢 ∗ 𝑟𝑟
4. If the loan becomes non-performing it incurs in some costs to either default
management or loss mitigation that we name indirect costs (ic). These costs are the fee
that the loan servicer will charge for their services and it is a percentage of the Gross
Value of the default loan. Then, the net value of the default loan (NBVd ) is:
𝑁𝐵𝑉𝑑 = 𝐺𝐵𝑉𝑑(1 − 𝑖𝑐)
5. Then, the bank with NPL has to provision for the losses in the loan. The provisions
should be the difference between the GBVu and the GBVd :
𝑃𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 = 𝐺𝐵𝑉
𝑢 − 𝐺𝐵𝑉𝑑
100
6. To avoid further losses on the loan, the bank will be willing to sell the NPL at GBVd .
Any price above this value will generate profits and any price below will further damage
the bank profitability and its capital position. Then, our ask price estimation for the loan,
the minimum price at which the bank would be willing to sell the loan, is GVBd :
𝑎𝑠𝑘 = 𝐺𝑉𝐵𝑑
7. The ask price will be higher if the NPL is under provision to avoid inputting further
losses in the income statement. The more in need of capital and under provisioned the
higher the ask price by the seller bank.
𝑖𝑓 𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 < 𝐺𝐵𝑉
𝑢 − 𝐺𝐵𝑉𝑑
𝑎𝑠𝑘 = 𝐺𝑉𝐵𝑢 − 𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛
8. Potential NPL buyers need to take into consideration the GBVd , the indirect costs to
recover the loan (ic) and its expected profit. This expected profit should be weighted by
risk. However, for simplicity reasons, our assumption is a plain profit of 15% on top of
the loan effective interest rate. Then, the bid price, the maximum price that the buyer is
willing to pay will be:
𝑏𝑖𝑑 =
𝐹𝑛 ∗ 𝑟𝑟
(1 + 𝑖 + 0.15)𝑛
− 𝑖𝑐
9. The bid ask spread in the secondary market for NPLs will be:
𝑏𝑖𝑑 𝑎𝑠𝑘 𝑠𝑝𝑟𝑒𝑎𝑑 = 𝑎𝑠𝑘 − 𝑏𝑖𝑑
Then the drivers of the differences in bid ask spread among EU MS will be:
a. The loan effective rate
b. The time to recover the loan
c. The recovery rate
d. The indirect costs
e. The provisions
f. The buyer expected profit
Calibration of the model
To provide an estimation of the differences in bid ask spread on NPLs among MS, we
have gathered information from World Bank, Doing Business 2016.
The loan effective rate is calculated for every MS using the interest rate of new lending
to non-financial corporations with a maturity of 1-5 years. This data is compiled by the
ECB.
101
We use the time to recover the loan, the recovery rate and the indirect costs provided by
The World Bank in its publication Doing Business 2016. The values of these variables
for each MS are calculated based on the time, cost and outcome of insolvency
proceedings in a given economy.
Time remaining to collect the cash flow from the NPL loan is provided either by NBER
and Doing Business. NBER data is from 2006 whereas data from World Bank is from
2016. The values are not the same but the differences are small for all the Member States
but the Czech Republic and Romania.
To make the data on recovery rate comparable across countries, several assumptions
about the business and the case are used. The recovery rate is recorded as cents on the
dollar recovered by secured creditors through reorganization, liquidation or debt
enforcement (foreclosure or receivership) proceedings. The calculation takes into account
the outcome: whether the business emerges from the proceedings as a going concern or
the assets are sold piecemeal. Then the costs of the proceedings are deducted (1 cent for
each percentage point of the value of the debtor’s estate). Finally, the value lost as a
result of the time the money remains tied up in insolvency proceedings is taken into
account, including the loss of value due to depreciation of the hotel furniture. Consistent
with international accounting practice, the annual depreciation rate for furniture is taken
to be 20%. The furniture is assumed to account for a quarter of the total value of assets.
The recovery rate is the present value of the remaining proceeds, based on end-2015
lending rates from the International Monetary Fund’s International Financial Statistics,
supplemented with data from central banks and the Economist Intelligence Unit. It is
important to note that the drivers of the recovery rate, i.e. the cost, the time and the
binary outcome of the process (the company continues to operate or is sold piecemeal)
are derived from questionnaire responses by local insolvency practitioners and verified
by the World Bank through a study of laws and regulations as well as public information
on insolvency systems. In other words, the recovery rates calculated by the World Bank
are not directly based on an average of observed recovery rates.
The estimated cost of the insolvency proceeding or indirect costs are reported as a
percentage of the value of the insolvency estate, borne by all parties. Costs include
court/bankruptcy authority costs, attorney fees, bankruptcy administrator fees, accountant
fees, notification and publication fees, assessor or inspector fees, asset storage and
preservation costs, auctioneer fees, government levies and other associated insolvency
costs. These costs will be mainly the fee that the third-party loan servicers will charge.
Once again there are small differences or not differences at all in these values between
NBER and Doing Business for all Member States but Austria, Denmark and Poland. In
these three countries the indirect costs reported by NBER are substantially higher than
the ones we use in our calculations.
We have made the assumption that the bank provisions the difference between the Gross
Book Value of the performing loan less the Gross Book Value of the non-performing
loan. If the bank has a higher provision mean it is over provisioned if the bank has a
102
lower provision it means the bank is under provision for that NPL. Banks that are in
trouble because low profitability and higher capital needs tend to be under provision,
which means they will ask for a higher price that if they were better provisioned.
Finally, our assumption for the buyer (investment fund) is that it will enter the secondary
market if it can make a profit. When the buyers of NPLs enter the market they will use
the services of third-party loan servicers. Then, the buyers of NPLs in the secondary
market will take into account in their bid price the indirect costs, or costs associated with
loan servicing, and the expected profit. For the expected profit, the IRR of the external
investors (hedge funds, mutual funds, other non-bank investors, etc), we have made the
assumption that the external investors identify buying NPLs as a risky business so they
applied an excess return of 15%111
on top of the rate of return adjusted for country risk in
each country112
. Then the IRR in each country is the sum of the excess return because of
NPL specificities + the rate of return adjusted for country risk.
Table A.4.2: Spreads in bid ask prices for NPLs in MS. Current situation
Ccy Future
Value
(EUR)
Lending
rates as
of Oct
2015
Time to
recover
(years)
Gross
Book
Value
PL
(EUR)
recovery
rate per
unit
(t=0)
Gross
Book
Value
NPL
(EUR)
Indirect
costs
(EUR)
Net
Book
Value
NPL
Ask Buyer
expected
rate of
return
Bid Spread
Fn i n GBVu rr GBVd ic NBVd
AT EA 100,00 1,98% 1,10 97,87 0,83 82,80 8,28 74,52 82,80 16,98% 62,92 19,88
BE EA 100,00 2,05% 0,90 98,19 0,90 89,90 3,15 86,75 89,90 17,05% 76,32 13,58
BG BG 100,00 5,14% 3,30 84,76 0,35 34,90 3,14 31,76 34,90 20,14% 19,33 15,57
CY EA 100,00 4,31% 1,50 93,87 0,73 72,80 10,56 62,24 72,80 19,31% 48,96 23,84
CZ CZ 100,00 3,10% 2,10 93,79 0,67 66,50 11,31 55,20 66,50 18,10% 38,69 27,81
DE EA 100,00 2,89% 1,20 96,64 0,84 84,40 6,75 77,65 84,40 17,89% 64,93 19,47
DK DK 100,00 1,93% 1,00 98,11 0,88 88,00 3,52 84,48 88,00 16,93% 73,19 14,81
EE EA 100,00 3,11% 3,00 91,22 0,40 40,30 3,63 36,67 40,30 18,11% 23,19 17,11
EL EA 100,00 5,09% 3,50 84,05 0,36 35,60 3,20 32,40 35,60 20,09% 19,11 16,49
ES EA 100,00 3,19% 1,50 95,40 0,78 78,30 8,61 69,69 78,30 18,19% 55,26 23,04
FI EA 100,00 3,43% 0,90 97,01 0,90 90,30 3,16 87,14 90,30 18,43% 76,78 13,52
FR EA 100,00 2,47% 1,90 95,47 0,79 78,50 7,07 71,44 78,50 17,47% 53,49 25,01
HR HR 100,00 5,28% 3,10 85,26 0,34 33,70 4,89 28,81 33,70 20,28% 17,41 16,29
HU HU 100,00 2,33% 2,00 95,50 0,43 43,00 6,24 36,77 43,00 17,33% 26,47 16,53
IE EA 100,00 5,00% 0,40 98,07 0,88 87,70 7,89 79,81 87,70 20,00% 75,25 12,45
111
This would be the premium that market investors demand for participate in the NPL secondary
market on top of adjusted rate of return. This is the premium proposed for NPL external investors
in the Financial Stability Review of November 2016.
112
The return adjusted for risk includes the risk free rate and the excess return adjusted for the
differences in country risk observed in MS. We approximate this return adjusted for country risk
as the lending rate in each MS.
103
IT EA 100,00 3,71% 1,80 93,65 0,64 63,90 14,06 49,84 63,90 18,71% 36,05 27,85
LT EA 100,00 3,07% 2,30 93,28 0,45 45,00 4,50 40,50 45,00 18,07% 28,42 16,58
LU EA 100,00 1,52% 2,00 97,03 0,44 43,70 6,34 37,36 43,70 16,52% 26,84 16,86
LV EA 100,00 5,24% 1,50 92,63 0,49 49,10 4,91 44,19 49,10 20,24% 35,29 13,81
MT EA 100,00 1,88% 3,00 94,57 0,41 40,70 4,07 36,63 40,70 16,88% 22,89 17,81
NL EA 100,00 3,35% 1,10 96,44 0,89 89,30 3,13 86,17 89,30 18,35% 73,81 15,49
PL PL 100,00 3,18% 3,00 91,04 0,61 60,60 9,09 51,51 60,60 18,18% 31,24 29,36
PT EA 100,00 3,67% 2,00 93,05 0,74 74,20 6,68 67,52 74,20 18,67% 49,95 24,25
RO RO 100,00 6,93% 3,30 80,16 0,34 34,40 3,61 30,79 34,40 21,93% 18,69 15,71
SE SE 100,00 1,67% 2,00 96,74 0,78 77,90 7,01 70,89 77,90 16,67% 52,15 25,75
SI EA 100,00 4,29% 0,80 96,70 0,89 89,20 3,57 85,63 89,20 19,29% 76,54 12,66
SK EA 100,00 4,89% 4,00 82,62 0,56 55,60 10,01 45,59 55,60 19,89% 22,57 33,03
UK UK 100,00 2,55% 1,00 97,51 0,89 88,60 5,32 83,28 88,60 17,55% 71,98 16,62
Average 19,22
Benchmarks
JPN 100,00 4,20% 0,6 97,56 0,921 89,85 3,77 86,08 7,71 89,85 19,20% 79,11
USA 100,00 10,00% 1,5 86,68 0,786 68,13 6,81 61,32 18,55 68,13 25,00% 49,42866
CHE 100,00 4,50% 3 87,63 0,466 40,84 1,84 39,00 46,79 40,84 19,50% 25,46992
Scenario analysis
Once we have calculated the bid-ask spread in the NPL secondary for the current
situation we estimated the effect that the different policy options could have on such
spread. We distinguish between policy options that could increase the investor base and
the policy options to improve the availability of third-party loan servicers. On the other
hand, we have observed, using country data, that there is a correlation between the two
year variation in the NPL ratio ( NPL loans / total loans) and the bid ask spread.
Applying regression analysis we estimated that for 1% decrease in the bid ask spread
there is a 0.88% decrease in the NPL ratio, which means that, “ceteris paribus”, there
would be a reduction of 0.88% in the volume of NPLs every two years, or 0.44% each
year (see Annex 4.2). Our assumption is that such reduction on NPLs will increase the
volume of transactions on NPLs or NPL sales from banks to investors. To estimate the
incremental volume of NPL sales for the next two years in each MS we multiply the
reduction in bid ask spread times 0.88% (this is the correlation found) and times the
volume of NPL in each country at the end of first quarter of 2017, the last available
information from ECB.
The options are: common principles, passporting and rule book for both NPL investors
and loan servicers. The next step has been to quantify such policy options in the NPL
market.
Policy scenarios for NPL investors
To quantify the impact of NPL investors’ policy options on NPL market our assumption
is that such policy will contribute to reduce risk perception by investors in EU Member
States. Such reduction will occur through a convergence in the rate of return required by
104
investors in a market that becomes European, because of the policy measures to improve
market efficiency, therefore more efficient that those MS individual markets consider
isolated. Such reduction will contribute to reduce the bid ask spread in the NPL market
which will increase the volume of NPL transactions.
Policy option A for NPL investors is to have minimum common standards for investors
across EU Member States. To quantify the impact of such policy on NPL market our
assumption is that such policy will contribute to reduce risk perception by investors in
some EU MS, those with more entry barriers: BG, EL, IT, CY, HU, AT, PL, and RO. For
these countries our assumption under policy option A is that they will adjust their return
adjusted by country risk to the benchmark of 1.9%. The benchmark is the average
lending rate of the countries with the lowest country risk. Such reduction will contribute
to reduce the bid ask spread in the NPL market which will increase the volume of NPL
transactions.
Figure A.4.9: Lending rates as country-specific risk premium in investors' required return
Source: Commission calculations with ECB data of MFI interest rates of new lending to non-financial
corporations maturity 1-5 years in October 2015.
Policy option B for NPL investors is to implement a common passport for NPLs
investors. To quantify the impact of such policy on NPL market our assumption is that
such policy will contribute to reduce risk perception by investors, specifically in those
EU MS with country risk above the benchmark (1.9%). We assume that all the MS will
benefit of the European market framework with a reduction of 50 basis points in the rate
of return demanded by investors, besides those MS with country risk above the
benchmark will converge by 50% to the benchmark. The benchmark is the average
lending rate of the countries with the lowest country risk. Such reduction will contribute
to reduce the bid ask spread in the NPL market which will increase the volume of NPL
transactions.
Policy option C for NPL investors is to implement a common rule book for NPLs
investors. To quantify the impact of such policy on NPL market our assumption is that
such policy will contribute to reduce risk perception by investors, such that the worst
performers will adjust their rate of return to the benchmark but at the same time the best
performers will also adjust to the benchmark which will penalize then. We assume that
105
all the MS will benefit of the European market framework with a reduction of 50 basis
points in the rate of return demanded by investors, besides those MS with country risk
above the benchmark will converge by 50% to the benchmark whereas those MS below
the benchmark will move to the benchmark reducing the distance by 25%. The
benchmark is the average lending rate of the countries with the lowest country risk. Such
reduction will contribute to reduce the bid ask spread in the NPL market which will
increase the volume of NPL transactions.
Table A.4.3: Changes in Spreads in bid ask prices for different policy scenarios in NPL markets (convergence loan
rates)
Current
spread
New
spread if A
Change
in
Spread
incremental
NPL sales
(billion €)
New
spread if
B
Change
in
Spread
incremental
NPL sales
(billion €)
New
spread if
C
Chang
in
Spread
incrementa
l NPL
sales
(billion €)
AT EA 19,88 19,86 -0,02 0,00 19,52 -0,36 0,08 19,52 -0,36 0,08
BE EA 13,58 13,58 0,00 0,00 13,23 -0,35 0,07 13,23 -0,35 0,07
BG BG 15,57 14,89 -0,67 0,03 14,21 -1,36 0,06 14,21 -1,36 0,06
CY EA 23,84 23,24 -0,60 0,12 22,55 -1,30 0,27 22,55 -1,30 0,27
CZ CZ 27,81 27,81 0,00 0,00 26,82 -0,99 0,06 26,82 -0,99 0,06
DE EA 19,47 19,47 0,00 0,13 18,74 -0,73 0,41 18,74 -0,73 0,41
DK DK 14,81 14,81 0,00 0,00 14,47 -0,34 0,05 14,47 -0,34 0,05
EE EA 17,11 17,11 0,00 0,00 16,35 -0,77 0,00 16,35 -0,77 0,00
EL EA 16,49 15,79 -0,70 0,70 15,07 -1,42 1,43 15,07 -1,42 1,43
ES EA 23,04 23,04 0,00 0,00 22,10 -0,94 1,12 22,10 -0,94 1,12
FI EA 13,52 13,52 0,00 0,00 12,75 -0,78 0,03 12,75 -0,78 0,03
FR EA 25,01 25,01 0,00 0,00 24,23 -0,78 1,03 24,23 -0,78 1,03
HR HR 16,29 16,29 0,00 0,00 14,98 -1,31 0,06 14,98 -1,31 0,06
HU HU 16,53 16,45 -0,08 0,00 16,12 -0,40 0,02 16,12 -0,40 0,02
IE EA 12,45 12,45 0,00 0,00 11,88 -0,58 0,18 11,88 -0,58 0,18
IT EA 27,85 27,39 -0,46 1,20 26,77 -1,09 2,85 26,77 -1,09 2,85
LT EA 16,58 16,58 0,00 0,00 15,87 -0,71 0,01 15,87 -0,71 0,01
LU EA 16,86 16,86 0,00 0,00 16,58 -0,29 0,01 16,69 -0,18 0,01
LV EA 13,81 13,81 0,00 0,00 12,69 -1,11 0,01 12,69 -1,11 0,01
MT EA 17,81 17,81 0,00 0,00 17,47 -0,35 0,00 17,47 -0,34 0,00
NL EA 15,49 15,49 0,00 0,00 14,61 -0,89 0,35 14,61 -0,89 0,35
PL PL 29,36 28,92 -0,44 0,06 28,17 -1,19 0,16 28,17 -1,19 0,16
PT EA 24,25 24,25 0,00 0,00 22,91 -1,35 0,53 22,91 -1,35 0,53
RO RO 15,71 14,67 -1,03 0,06 13,78 -1,92 0,11 13,78 -1,92 0,11
SE SE 25,75 25,75 0,00 0,00 25,24 -0,51 0,05 25,36 -0,39 0,04
SI EA 12,66 12,66 0,00 0,00 11,74 -0,92 0,03 11,74 -0,92 0,03
SK EA 33,03 33,03 0,00 0,00 30,77 -2,26 0,04 30,77 -2,26 0,04
UK UK 16,62 16,62 0,00 0,00 16,08 -0,55 0,38 16,08 -0,55 0,38
Total 2,32 9,40 9,38
106
Policy scenarios for loan servicers
To quantify the impact of NPL investors’ policy options on loan servicers market our
assumption is that such policy will contribute to increase the number of third-party loan
servicers in MS which we associate with a reduction in the barriers of entry and in the
costs of providing loan servicing. Such reduction will occur through a convergence in the
cost of servicing that will improve market efficiency, therefore more efficient that those
MS individual markets consider isolated. Such reduction will contribute to reduce the bid
ask spread in the NPL market which will increase the volume of NPL transactions.
Policy option A for NPL investors is to have minimum common standards for loan
servicers across EU MS. To quantify the impact of such policy on NPL market our
assumption is that such policy will contribute to reduce servicer costs in some EU MS,
those with more barriers: EL,IT,CY and AT. For these MS our assumption under policy
option A is that they will be able to adjust their cost by 10%. Such reduction will
contribute to reduce the bid ask spread in the NPL market which will increase the volume
of NPL transactions.
Policy option B for NPL investors is to implement a common passport for loan servicers.
To quantify the impact of such policy on NPL market our assumption is that such policy
will contribute to reduce loan-servicing costs by 10% in all countries due to the higher
size of the market and those MS with cost above the benchmark will close the gap by
50%. The best performers MS in terms of cost will be able to keep such advantage. The
benchmark is the average cost among those countries with the best cost records. Such
reduction will contribute to reduce the bid ask spread in the NPL market which will
increase the volume of NPL transactions.
Figure A.4.10: Indirect costs of loan recovery as indicator of costs of loan servicing
Source: Commission calculations with World Bank Doing Business 2016 data of insolvency – cost of
recovery in %.
Policy option C for NPL investors is to implement a common rule book for loan
servicers. To quantify the impact of such policy on NPL market our assumption is that
such policy will contribute to reduce loan-servicing costs by 10% in all countries due to
the higher size of the market and the cost gap between each country and the benchmark
will close the gap 50%. The best performers MS in terms of cost will suffer an increase
107
in their cost due to the convergence to the benchmark. The benchmark is the average cost
among those countries with the best cost records. The reduction in costs will contribute
to reduce the bid ask spread in the NPL market which will increase the volume of NPL
transactions.
Table A.4.4: Changes in Spreads in bid ask prices for different policy scenarios in NPL markets (convergence costs)
Current
spread
New
spread if
A
Change in
Spread
incremental
NPL sales
(billion €)
New
spread if B
Change
in Spread
incremental
NPL sales
(billion €)
New
spread
if C
Change
in
Spread
incremental
NPL sales
(billion €)
AT EA 19,88 19,05 -0,83 0,18 18,64 -1,24 0,27 18,64 -1,24 0,27
BE EA 13,58 13,58 0,00 0,00 13,27 -0,31 0,06 14,51 0,92 -0,18
BG BG 15,57 15,57 0,00 0,00 15,25 -0,31 0,01 15,25 -0,31 0,01
CY EA 23,84 22,79 -1,06 0,22 20,79 -3,06 0,64 20,79 -3,06 0,64
CZ CZ 27,81 27,81 0,00 0,00 24,02 -3,79 0,24 24,02 -3,79 0,24
DE EA 19,47 19,47 0,00 0,00 18,79 -0,68 0,38 19,00 -0,46 0,26
DK DK 14,81 14,81 0,00 0,00 14,46 -0,35 0,05 15,56 0,75 -0,11
EE EA 17,11 17,11 0,00 0,00 16,75 -0,36 0,00 16,75 -0,36 0,00
EL EA 16,49 16,17 -0,32 0,32 16,17 -0,32 0,32 16,17 -0,32 0,32
ES EA 23,04 23,04 0,00 0,00 21,39 -1,64 1,96 21,39 -1,64 1,96
FI EA 13,52 13,52 0,00 0,00 13,21 -0,32 0,01 14,45 0,93 -0,04
FR EA 25,01 25,01 0,00 0,00 24,30 -0,71 0,93 24,30 -0,71 0,93
HR HR 16,29 16,29 0,00 0,00 14,87 -1,42 0,07 14,87 -1,42 0,07
HU HU 16,53 16,53 0,00 0,00 14,72 -1,81 0,11 14,72 -1,81 0,11
IE EA 12,45 12,45 0,00 0,00 11,67 -0,79 0,25 11,67 -0,79 0,25
IT EA 27,85 26,44 -1,41 3,69 22,29 -5,56 14,59 22,29 -5,56 14,59
LT EA 16,58 16,58 0,00 0,00 15,90 -0,68 0,01 15,90 -0,68 0,01
LU EA 16,86 16,86 0,00 0,00 15,03 -1,84 0,06 15,03 -1,84 0,06
LV EA 13,81 13,81 0,00 0,00 13,07 -0,74 0,01 13,07 -0,74 0,01
MT EA 17,81 17,81 0,00 0,00 17,20 -0,61 0,01 17,20 -0,61 0,01
NL EA 15,49 15,49 0,00 0,00 15,18 -0,31 0,12 16,41 0,92 -0,36
PL PL 29,36 29,36 0,00 0,00 26,63 -2,73 0,36 26,63 -2,73 0,36
PT EA 24,25 24,25 0,00 0,00 23,58 -0,67 0,26 23,58 -0,67 0,26
RO RO 15,71 15,71 0,00 0,00 15,09 -0,62 0,03 15,09 -0,62 0,03
SE SE 25,75 25,75 0,00 0,00 25,05 -0,70 0,07 25,05 -0,70 0,07
SI EA 12,66 12,66 0,00 0,00 12,30 -0,36 0,01 13,42 0,76 -0,02
SK EA 33,03 33,03 0,00 0,00 29,53 -3,50 0,06 29,53 -3,50 0,06
UK UK 16,62 16,62 0,00 0,00 16,09 -0,53 0,37 16,75 0,13 -0,09
Total 4,41 21,27 19,74
Extension of the policy scenarios
Additionally, we have consider the improvement in the time to recover the defaulted
loans because of these policies or even because other initiatives on NPLs, for instance
AECE. As a reduction in the time to recover loans favours the shrinkage of bid-ask
108
spread, we have estimated the incremental volumes of NPL sales if time to recover
adjusts to the values proposed in the AECE Impact assessment.
Table A.4.5: Changes in spread in time to recover adjust ACE
Current spread New spread if time to recover ACE Change in Spread incremental NPL
sales (billion €)
AT 19,88 19,88 0,00 0,00
BE 13,58 13,58 0,00 0,00
BG 15,57 12,70 -2,87 0,13
CY 23,84 23,84 0,00 0,00
CZ 27,81 25,73 -2,08 0,13
DE 19,47 19,47 0,00 0,00
DK 14,81 14,81 0,00 0,00
EE 17,11 14,44 -2,67 0,01
EL 16,49 13,30 -3,19 3,21
ES 23,04 23,04 0,00 0,00
FI 13,52 13,52 0,00 0,00
FR 25,01 23,33 -1,68 2,22
HR 16,29 13,78 -2,51 0,12
HU 16,53 15,62 -0,91 0,05
IE 12,45 12,45 0,00 0,00
IT 27,85 26,83 -1,03 2,69
LT 16,58 14,74 -1,84 0,01
LU 16,86 15,70 -1,16 0,04
LV 13,81 13,81 0,00 0,00
MT 17,81 15,09 -2,72 0,02
NL 15,49 15,49 0,00 0,00
PL 29,36 25,34 -4,02 0,53
PT 24,25 22,70 -1,55 0,61
RO 15,71 12,91 -2,80 0,16
SE 25,75 24,10 -1,65 0,17
SI 12,66 12,66 0,00 0,00
SK 33,03 27,11 -5,92 0,10
UK 16,62 16,62 0,00 0,00
Total 10,22
Besides, we have estimated the incremental volumes of NPL sales if option A for NPL
investors and option B for loan servicers would be adopted at the same time with and
without taking into account the improvement in the time to recover the non-performing
loans.
Table A.4.6. Changes in Spread if apply scenario a for NPL investors and scenario b for Loan servicers
Current spread New spread NPL
scenario A + Loan
servicers escenario B
Change in
Spread
incremental NPL sales
(billion €)
new spread A+B
plus reduction
time to recover
AECE
Change in
Spread
incremental
NPL sales
(billion €)
109
AT 19,88 18,62 -1,26 0,28 18,62 -1,26 0,28
BE 13,58 12,92 -0,67 0,13 12,92 -0,67 0,13
BG 15,57 13,89 -1,67 0,08 11,28 -4,29 0,20
CY 23,84 19,49 -4,36 0,91 19,49 -4,36 0,91
CZ 27,81 23,03 -4,78 0,30 21,05 -6,75 0,43
DE 19,47 18,06 -1,41 0,79 18,06 -1,41 0,79
DK 14,81 14,12 -0,69 0,10 14,12 -0,69 0,10
EE 17,11 15,98 -1,13 0,00 13,43 -3,68 0,01
EL 16,49 14,75 -1,74 1,75 11,83 -4,65 4,69
ES 23,04 20,45 -2,58 3,08 20,45 -2,58 3,08
FI 13,52 12,43 -1,09 0,04 12,43 -1,09 0,04
FR 25,01 23,53 -1,48 1,96 21,91 -3,10 4,09
HR 16,29 13,56 -2,72 0,13 11,29 -4,99 0,25
HU 16,53 14,32 -2,21 0,13 13,44 -3,09 0,18
IE 12,45 11,09 -1,36 0,44 11,09 -1,36 0,44
IT 27,85 21,21 -6,64 17,43 20,25 -7,60 19,94
LT 16,58 15,20 -1,38 0,01 13,45 -3,13 0,02
LU 16,86 14,74 -2,12 0,07 13,61 -3,26 0,11
LV 13,81 11,96 -1,85 0,02 11,96 -1,85 0,02
MT 17,81 16,86 -0,96 0,01 14,19 -3,62 0,03
NL 15,49 14,30 -1,20 0,47 14,30 -1,20 0,47
PL 29,36 25,44 -3,92 0,52 21,61 -7,75 1,03
PT 24,25 22,24 -2,01 0,80 20,79 -3,46 1,37
RO 15,71 13,17 -2,54 0,14 10,73 -4,97 0,28
SE 25,75 24,54 -1,21 0,13 22,93 -2,82 0,29
SI 12,66 11,38 -1,28 0,04 11,38 -1,28 0,04
SK 33,03 27,27 -5,76 0,10 21,79 -11,24 0,19
UK 16,62 15,54 -1,08 0,74 15,54 -1,08 0,74
Total 30,60 40,15
Conclusions
Instead of a conclusion, a word of caution is warranted. The outcome of the simulations
with the pricing model is assumption-driven. The coefficients obtained in the cross-
country analysis suffer from unsatisfying data and a very small number of observations.
Hence, there are good reason to challenge each step in the simulations exercise and the
results serve only to illustrate the issues and may help assess the relative performance of
the different policy options rather than be taken as a guidance on how NPL markets can
actually develop.
110
4. TRANSLATING THE SCORES FOR THE ASSESSMENT CRITERIA INTO AN OVERALL
RANKING OF THE POLICY OPTIONS
The Table below summarises the ranking of the different policy options in Table 6, Table
7, and Table 8.
Table A.4.7: Summary of options and their effects
Baseline non-binding
common
principles
Directive with
common standards
and use of passports
Regulation with fully
harmonised rules and
common market
supervision
NPL investors
1.Address failures in (national) NPL markets
stimulates entry into
MS with high entry
barriers
0 + ++ +++
incentivises smaller
firms to enter 0 + +++ +++
2.Foster a single NPL market
equal treatment across
MS 0 0 ++ +++
incentivises entry of
firms from outside the
EU
0 + ++ ++
realises scale effects 0 0 0 0
3. Safeguards for borrower rights
Ensure efficient
supervision 0 - -- ---
Costs of adjustment of
laws that protect
borrower rights
0 - -- ---
Loan Servicers
1. Address failures in (national) NPL markets
stimulates entry into
MS with high entry
barriers
0 + ++ +++
incentivises smaller
firms to enter 0 + ++ ++
2. Foster a single NPL market
equal treatment across
MS 0 0 ++ +++
incentivises entry of
firms from outside the
EU
0 + ++ +++
realises scale effects 0 ++ +++ +++
3. Safeguards for borrower rights
Ensure efficient
supervision 0 - -- ---
Costs of adjustment of
laws that protect
borrower rights
0 - -- ---
111
An overall ranking of effectiveness was derived by averaging the sum of plusses for
investors and servicers. Efficiency is the difference of effectiveness and the average sum
of minuses for investors and servicers.
Table A.4.8: numerical results for effectiveness and efficiency
Baseline
Option 1 – Non-binding
principles
Option 2 – Minimum
standards
Effectiveness 0 8/2=4 20/2=10
Efficiency 0 4-2=2 10-4=6
Finally, a + is allocated for a score in the range 1 to 4, ++ in the range 5-8, +++ in the
range 9-12.
Table A.4.9: Scoring for effectiveness and efficiency
Baseline
Option 1 – Non-binding
principles
Option 2 – Minimum
standards
Effectiveness 0 + (score 4) +++ (score 10)
Efficiency 0 + (score 2) ++ (score 6)
112
ANNEX 5: MARKET OVERVIEW
1. NATURE AND SIZE OF THE NPL MARKET
Fragmentation of market and legal conditions along the increases entry costs especially
for international investors. Though there have been numerous transactions in NPLs in the
EU in the last years, there is no single market for NPLs, but fragmented early stage
national markets. This section reviews the available data on NPL transactions and puts
them in perspective. A more comprehensive review of market conditions can be found in
Bruegel (2017).
Absent public data collections, the only available numbers of NPL transactions stem
from publications of consultancy firms. These collect data from public sources and may
also use information from their business relationships. They report that they cannot
guarantee accuracy of the data and the observation of discrepancies between data coming
from different consultancies underlines the difficulty to keep track of NPL markets.
Commission research on NPL transactions found that only few and large transactions are
reported in main media. Smaller transactions are reported on specialised websites, but
often lack details about buyer, seller and/or amounts (see also Annex 4.2).
Between 2014 and 2017, consultancies recorded transaction volumes between 100 and
150 billion EUR per annum in secondary markets for loans in the EU.113
The
consultancies that collect data do not provide information about the share of NPLs in
loan sales. The three approaches presented in Annex 4.2 suggest that the average share of
NPL in loan sales could be 70 to 80%. The charts below indicate the evolution of loan
transactions across the main EU markets by various sources.
113
The number is measured in book values (unpaid primary balance) and is comparable to the
amount banks can free from their balance sheet. Since prices are much lower than 100%, both
transaction values and invested amounts by non-banks are also smaller.
Box A.5.1: Caveats on the data on NPL sales
There is no official statistics on transactions data of NPLs. Official documents regularly quote
data from consultancies, which report data in publications or on websites. These consultancies
cannot scrutinise the data quality as rigorously as statistical offices could do. Moreover, a
number of data limitations may distort the information content Bruegel 2017 lists the
following:
 One cannot differentiate between non-performing assets and other non-core assets.
 If a bank sells NPLs, the transaction might be so structured that it still retains exposure to
the loan.
 Buyers may be other banks, so that the NPLs remain in the banking sector.
 Non-banks may re-sell NPLs, so that the transaction volume does not reduce the NPL
ratio of the banking sector.
Moreover, details of transactions are not disclosed in several cases. Sometimes the buyer,
seller and/or volumes are not made public. The data collectors' different strategies to
circumvent this limitation may be accountable for difference in the statistics.
113
Figure A.5.1: Transaction volumes on loan markets, sum of 2015 and 2016 in billion of EUR
Source: AFME (2017), Deloitte (2017a, 2017b), PWC(2017).
The NPL market has been highly concentrated. The breakdown of transactions by
country suggests strong variation, with a strong clustering in four countries: ES, IE, IT
and the UK. In the former three NPL sales contributed substantially to reduced high NPL
ratios. There have been few transactions In other countries with high NPL ratios (CY,EL,
PT, RO, SI) and sizeable market activity in countries with low NPL ratios (UK, DE, NL).
In CEEC, markets for NPLs seem emerging, but are still at infant stage.114
The 10 largest
transactions in 2015/16 accounted for one third of the transaction volume, while the other
two third was distributed over about 480 transactions. Very few transactions were
recorded with a volume below EUR 100 million.115
Of the 103 banks that disclosed transactions, about 40 had multiple transactions. NAMA
and SAREB, the Irish respectively Spanish asset management company were the most
important sellers. The loan portfolios banks sell cover very different asset classes and
according to market sources some buyers are specialised in specific asset classes. The
figure below gives a snapshot of market shares by asset class based from a sample of 365
NPL transactions signed in 2015-2017.
The share of loans owed by consumers is unknown because loans are sold in large
portfolios, which are often mixed and do not allow to calculate a breakdown by
counterpart. The share was at least 11% according to AFME (2017), see Figure A.5.2.116
114
See Deloitte (2017).
115
Around 10% in our sample.
116
See Figure A.5.2 in Annex 5.
114
n banks’ balance sheets, about a third of the NPL had consumers as counterpart.117
There is little data bout the breakdown into consumer credit and mortgages118
, i.e. those
being regulated through the Consumer Credit Directive and the Mortgage Credit
Directive.119
Since consumer credits are smaller, NPL purchaser are more likely to
outsource their management to loan servicing firms.
Figure A.5.2: Loan sales by underlying loan category
Source: COM calculations with KPMG data, which is retrieved from publicly available sources.
On the buyer side, there are about 120 debt managers that invest in distressed debt in
North America and Europe.120
In Europe, almost 40% of the transaction deals was
accountable to the biggest five buyers. More than 20 of the active investors were large
investment funds with a market share of almost 50%.121
Most buyers are investment
firms, but also a few banks bought loans.122
Table A.5.1: Largest investors in distressed debt (Source: Prequin)
Firm origin
Total Funds Raised in
Last 10 Years ($mn)
Estimated Dry Powder
($mn)
Fortress Investment Group USA 15842 6884
GSO Capital Partners USA 19403 4970
117
34.8% in 2016 according to ECB data.
118
Mortgage loans to households were EUR 4189 billion at end 2016 and credit for consumption o
households 1049 billion, without, however a breakdown into performing and non-performing
loans available in ECB statistics. In Portugal, the NPL ratio of mortgages was 6.7% and that of
consumer credit NPLs at 10% according to European Commission (2017c).
119
Directive 2008/48/EC and Directive 2014/17.
120
Prequin special report: Distressed debt in North America and Europe. 2016.
121
See Brugel (2017).
122
In our sample 15 banks accounting for 12% of the transaction volume.
Consumers, SME, retail
Corporate
Commercial real estate
Residential
Secured loans
Unsecured
other
115
Centerbridge Capital Partners USA 17640 4724
Sankaty Advisors USA 13184 3595
Oaktree Capital Management USA 55686 3590
CarVal Investors USA 13968 2499
Avenue Capital Group USA 19041 2133
Castlelake USA 4269 1999
Catalyst Capital Group CND 3269 1967
Cerberus Capital Management USA 9329 1923
The table below breaks down investors into EU NPLs by the amount of national markets
they were active in. The dominant number of investment firms was active in only one
market and a few concentrated on 2 or three markets. The small number of investment
firms active on four or more markets accounted for about a third of all transactions.
Table A.5.3: The geographical reach of NPL investors
Number of Member States
invested in
number of
firms
number of
transactions
average transaction size in
million EUR
>4 11 110 573.3
3 5 28 756.3
2 10 65 503.0
1 85 116 616.6
Source: COM calculations with KPMG data, which is retrieved from publicly available sources.
Table A.5.4. Main European NPL investors and key company figures
2016 numbers in million EUR. Company numbers relate to the total group, not its NPL business.
Source: Company annual reports 2016.
Though not all NPL buyers have been investment funds, they represent a sizeable market
share. As regards the potential investor base for NPL, it is interesting to identify
investment funds that specialised in comparable products. The table below shows the free
capacity debt investment funds had, using a mathematical approach to allocate the known
data about geographical focus and product focus to the individual cells. The approach
shows that distressed debt investors in North America have almost two times investment
capacity than European investors. Other asset classes are smaller and also more
dissimilar to NPLs.
Company
name HQ
Number of countries
Operating
income/revenue EBITDA total assets
where it
operates
of which
EU
B2 Holding NO 23 20 125.23 143.24 630.88
Eos Group DE 26 677.56 226.61 1 526.34
Kruk Group PL 9 9 185.98 86.07 734.92
Hoist Group SE 11 11 225.60 293.27 1 922.65
Intrum SE 23 23 611.24 329.61 1 446.16
Axactor NO 5 4 38.88 -0.01 271.89
BancaIFIS IT 1 1 237.69 66.27 4 995.60
Idea Fimit IT 1 1
LCM Partners UK 10 10
APS group LU 11 11 26.26 10.17 40.88
116
Table A.5.6: Estimated dry powder of investment funds specialised in private debt strategies, billion EUR 2017H.
Direct
Lending Mezzanine
Venture
Debt
Distressed
Debt Special Situations known total
North
America 47.1 39.4 1.3 51.8 17.7 157.3
Europe 19.3 16.2 0.5 21.3 7.3 64.6
Asia 3.1 2.6 0.1 3.5 1.2 10.5
Rest of
World 0.5 0.5 0.0 0.6 0.2 1.8
known total 70.1 58.7 1.9 77.1 26.4 234.2
Source: Commission calculations with Preqin data using the entropy approach. 123
Price data is usually not disclosed and some cases are reported that deals were aborted
because banks and prospective buyers could not agree on the price. If prices are lower
than what banks provisioned they realise a loss, which reduces their capital and therefore
inhibits their incentive to enter into a sales' deal. These coverage ratios differ strongly
across banks, being smaller in small than in large banks and stand at around 44% at the
EU aggregate level.124
Hence, for a price lower than 56% (100% - 44%), the "average"
bank would have to record a loss. There is a perception that EU banks may under-
provision their NPLs, derived from the observation that US coverage ratios were about
20 percentage points higher.125
The figure below shows average prices of NPL portfolio transaction taken from a
consultancy publication. It demonstrates that prices vary strongly depending on the type
of debt and the quality of the underlying collateral.
Figure A.5.3: Average price on face value of NPL portfolio transactions
123
Measured as dry powder, which consists of capital raised, capital committed and capital raised in the
past, but not yet deployed.
124
See FSC report, section 2.2.2.
125
See IMF euro area selected issues 2015.
117
Source: AFME (2017) quoting PWC data.
More information needs to rely on transactions reported in the press. For few selected
transactions, media or analytical reports quote or derive price data. For example,
Unicredit's sale of 17 billion EUR NPLs to PIMCO in August 2017 was reported to have
yielded 13%126
, MPS sale of junior NPL tranches to the Atlante II fund at 21%127
,
Carlites purchase of 900 million from Caixabank in 2015 at 25%128
, Algebris reportedly
paid 35% for a secured 750 million EUR NPL portfolio from Italian Banco BPM in
2017,129
Axactor revealed it bought several portfolios of Spanish consumer loans
between 6 and 7% in March 2016.130
For comparison, the FDIC, which is the public
institution in the USA in charge or resolving banks, realised 8-30% sales price relative to
book value on NPLs (see Table A.5.7).
Table A.5.7: Prices on secondary markets for loans in the USA
126
https://www.reuters.com/article/us-italy-banks-unicredit-npl-idUSKBN1A21SU
127
IMF Global market monitor on 5 July 2017
128
https://www.copernicusservicing.com/goldman-sach-cleans-caixabank/
129
https://www.bloomberg.com/news/articles/2017-06-09/algebris-said-to-be-winning-bidder-in-banco-
bpm-bad-loan-sale
130
http://epub.artbox.no/axactor/ar2016eng/#14/z
118
For some debt funds, profitability numbers are available. The number is however small,
especially for funds with a geographical focus on Europe. According to the data
available, average and median profitability was a bit higher in Europe than in America.
At the polar spectrum of the distribution, differences in profitability are more
pronounced, with low-profitability European investments being relatively more profitable
than American ones and vice versa for high-profitability investments131
.
131
The term "Investments" is here used for the geographical focus.
FDIC loan sales (USD values in million)
2016
Loan Type
Book
Value
Appraised
Value
Sales
Price
# Sold
% of
SP/BV
% of
SP/AV
Performing $1.60 $1.02 $1.30 11 81.25% 127.45%
Non-performing $15.74 $1.72 $1.28 16 8.13% 74.42%
Total 2016 $27.76 $6.31 $6.40 135 23.06% 101.43%
2015
Performing $347.59 $170.89 $236.91 2,904 68.16% 138.63%
Non-performing $402.34 $107.06 $110.61 2,666 27.49% 103.32%
Total 2015 $1,724.13 $717.45 $686.85 11,187 39.84% 95.74%
2014
Performing $197.94 $124.42 $133.90 1163 67.65% 107.62%
Non-performing $309.80 $66.62 $64.40 577 20.79% 96.67%
Total 2014 $771.64 $309.54 $321.63 2,499 41.68% 103.91%
2013
Performing $53.80 $33.99 $37.00 589 68.77% 108.86%
Non-performing $43.21 $12.56 $14.60 177 33.79% 116.24%
Total 2013 $259.88 $98.38 $109.96 1,555 42.31% 111.77%
2012
Performing $497.2 $265.35 $378.81 3621 76.19% 142.76%
Non-performing $123.45 $31.19 $37.43 768 30.32% 120.01%
Total 2012 $1,108.63 $504.29 $672.42 7,801 60.65% 133.34%
Note: Totals include sales of portfolios consisting of subperforming and non-performing
loans.
Source: FDIC
119
Table A.5.8: Profitability in % of investment funds
specialised in distressed debt with a focus on either
America Europe
average 11.1 11.6
median 10.7 12.1
weighted
average 10.9 10.5
Observations 69 18
missing
observations 31 8
Figure A.5.4: Distribution of profitability of investment
funds specialised in distressed debt
Note: Profitability measure is the net internal rate of return of the latest available observation. In most
cases 2017Q2. Missing observations are those funds for which no profitability number was displayed.
Source: Commission calculations with Preqin data.
Box A.5.2: Other determinants of the bid-ask gap
Market practitioners signalled other factors that cause a high bid ask spread in NPL
transactions.1
Different discount rates: As required by IAS 39, banks use the effective interest rate on the
loans. Investors use their required returns, which typically exceed 15%.
Administrative expenditure: Banks use administrative expenses and servicing fees in their
financial statement of the year in which they are incurred while investors deduct such costs
from the value when they calculate the net present value.
Reputational effects: Banks attach an extra value to loans from debtors, which whom they have
a long-term business relationship. They may not want to undermine the reputation they had
built up with customers important to them.
Poor data quality on loans and incomplete information on collateral value. Non-bank investors
need to spend resources in understanding the value of the NPL portfolio that is for sale.
Costs of capital and taxation. Non-banks may have higher costs of funding and be exposed to
extra costs linked to the transfer of the loan such as for registration.
As regards the underlying information asymmetry as genuine reason for high bid-ask spreads,
several mechanisms have emerged endogenously to reduce their importance. Market
participants signalled that the outlook for repeated transactions creates an incentive for banks
to fairly represent the value of the loans they offer for purchase. Collateralisation of loans also
helps because it puts a floor on the value of loans, provided the potential buyer is able to
ascribe a value to the collateral.1
Still, market participants flagged in the public consultation that
data issues are a very important concern for them. A specific workstream in the NPL Action Plan
is meant to address this issue.
A further mechanism in addition to information asymmetries is that consultancy firms or other
intermediaries bring together potential buyers and sellers. They assist in assessing the value of
the portfolio by scrutinising loans, collateral and data quality. They invest their reputation to
overcome the effect of information asymmetry and contribute to reducing the spread between
bid and supply so that demand and supply can meet. They also have an indispensable role
because of their knowledge of past deals to which they contributed, which means these are the
only players that have some kind of market overview of prices, loan quality, collateral and other
conditions.
120
The involvement of specialised information intermediaries does not totally reduce the bid-ask
spread as they charge a fee for their services. Moreover, intermediation does not mean that
market functioning is imitated. Intermediaries and big potential investors have an incentive to
limit competitive pressure in order to benefit from a positive bid-ask spread and the scope to
exploit the pressure on banks to sell, respectively.
121
2. NATURE AND SIZE OF THE LOAN SERVICING MARKET
About 40 groups with 100 firms are in this business line in the EU, some of them are
present in different countries, others are small or specialised in specific portfolios such as
real estate and combine loan servicing with other related activities. Market reports
witness a sizeable number of acquisitions in the loan servicing market in the last years,
some from NPL investors. Some big loan servicers entered the business of buying
loans.132
While there are some loan servicing firms that act in different Member States, they focus
on countries with already sufficient demand for loan sales. Moreover, their main entry or
expansion strategy has apparently been the acquisition of existing national loan servicers,
implying that expansion to a new market is difficult without national incumbents already
present. For selecting loan servicers, potential NPL buyers can rely on the advice of
consultancies, the ranking of around 30 firms done by S&P133
, or loan servicers also
active in the USA.134
What are loan servicers and what do they do?
During the life of a loan one can distinguish three different roles from the lender
perspective: Loan originators, Loan owners and Loan servicers. These three roles can be
play within the same institution (company) or by different companies. The scenarios
where these three lender roles split in different combinations are those where a portfolio
of loans is securitized or when the loan originator sells or outsources a portfolio of
defaulted or non-performing loans (NPLs).
Loan servicing is the administration of a loan or portfolio of loans from the time the
proceeds are dispersed until the loan is paid off. Loan servicing business combines two
lines of business: transaction processing and administration of defaulted loans.
Transaction processing would benefit from economies of scale because can easily be
automatized. However, the administration of defaulted loans needs a balance between
automated defaulted loans (default management) and "hands on" default loans. The first
option leads to foreclose whereas in the hands on procedure there is a loss mitigation goal
that requires significant trained manpower. Loss mitigation includes loan restructuring,
accepting a deed in lieu of foreclosure or approving a short sale.
132
E.g. Hoist, Kruk Group.
133
Standards & Poors: EMEA Servicer Evaluation Industry Report 2016.
134
The US Mortgage Bankers Association ranks loan servicing firms including a short list of firms
that serve non-US loans (11 entries). A few loan servicers activity in Europe are on this list
including Situs, CBRE loan services, Wells Fargo.
122
Loan servicing services include: sending monthly payment statements and collecting
monthly payments, borrower billing, payment posting, collection and loan accounting,
calculation of borrower interest and fees, set up and management of bank account
structures to effect dominion of cash, generation of borrower notices, payoff letters and
amortization schedules, maintaining records of payments and balances, collecting and
paying taxes and insurance (and managing escrow and impound funds ), remitting funds
to the note holder, and following up on delinquencies. Additionally they may also offer
their services for: pricing loans, helping borrowers who default on their loans through
loss mitigation options, due diligence advisory on the credit portfolio for disposals and
acquisitions, recovery, collateral performance, foreclosure litigation, manage foreclosed
properties, collateral reporting for lender credit analysis purposes, financial and collateral
reporting tracking, property inspections and real estate evaluation, commercialization and
sales.
Loan servicers' revenues come from the servicing fee. This fee can be either a fixed
percentage of the unpaid primary balance (UPB) of the underlying loan, ancillary fees for
late payment or loan modification, or interest earned on principal and interest and taxes
and insurance collected by the servicer before distribution.
There are in-house and third-party loan servicers, depending on whether the loans are
serviced by the loan originator or by an external company. The latter is common when a
portfolio of non-performing loans is managed. Besides, they are label as captive loan
servicers when the loan service firm is owned by the loan originator or by the loan
owner, or if they have a unique client or their portfolio is owned mainly by one loan
originator.
It is also common to distinguish between primary servicers, if the loan servicer manages
performing loans, special servicers, if the loan servicer manages NPLs, or master services
if loan servicer monitors a sub-servicer activity. Master servicers are responsible for the
oversight of primary servicers. Furthermore, loan servicers tend to manage three asset
classes, specialising in one of them or any combination of the three: asset finance,
residential mortgages and commercial mortgages.
Federal Reserve Board et al. (2016) identifies two risks on loan servicers: business risk
that can include legal compliance and reputational risk (due to regulations, including
consumer protections) and valuation risk that refers to the firm's ability to estimate a
value for its mortgage servicing activities and it is driven by interest rate and default risk.
Box A.5.3: The economic value added of loan servicers
It is debatable whether moving debt administration from a bank to a third-party loan servicer
yields economic benefits beyond addressing moral hazard issues which are present in a situation
123
where the loan originating bank maintains the loan servicing. It does not hold in general that
third-party loan servicers can extract more value from a portfolio of loans than a bank can.135
Administering an NPL portfolio is more costly than one of performing loans since it requires
follow-up action such as sending letters and notices, entering into negotiations about debt
rescheduling or taking legal enforcement action. Data from the US suggests that the servicing of
non-performing mortgage loans costs about 13 times more than that of performing loans.136
High
NPLs bind bank operating resources and potentially prevent banks from carrying out more
productive uses. This effect is particularly material in smaller banks having less specialised staff.
Larger banks tend to have separate business entities to keep costs under control whereas smaller
banks often have no capacity to do so.
A number of circumstances are listed below where NPL administration could be done effectively
or/and efficiently by third-party servicers:
 Non-bank firms sometimes specialise in this administration, realise scale effects in IT and
may resort to restructuring loans to increase the recovery value by re-negotiating payment
terms and maturities.137
Some loan servicing firms claim to increase recovery rates through
cooperation and striving for amicable solutions.138
 If non-bank investors have higher willingness to take risks to banks, and as not being subject
to bank regulation, or if they have special expertise in assessing particular market segments
such as commercial real estate loans, SME loans or ship loans, they can contribute to a
potentially higher valuation of NPLs than banks would. Some firms combine loan servicing
with other services such as administration of commercial real estate.
 Loan servicing firms may also specialise in loan enforcement through out-of court or judicial
action and benefit from either specialised legal expertise or from a longer time horizon than
banks have available. Reputation effects may also impact on recovery because either the loan
135
Banks may draw advantage from conducting loan servicing in view of future loan contracts with
the debtor or may find it easier to restructure loans with customers with which they hold a long-
term relationship. Compared to market financing, banks have a comparative advantage in
screening credit performance, but this unlikely holds for all banks and vis-a-vis firms specialised
in this activity. This consideration, however, may explain why banks have an interest in keeping
some NPLs on their balance sheets and also attach a higher valuation to these than external
investors without interest in the long-term credit relationship would do.
136
Data from the US mortgage bankers association quoted in Federal Reserve Board et al. (2016)
reveal that average servicing costs of performing loans were 175 USD and those of non-
performing loans 2375 USD in 2015. From the accounts of a European firm specialised in
acquiring non-performing consumer loans, one can derive collection costs of about 14% of
interest collected.
137
ESRB (2017) argues that bankers have a comparative advantage in borrower relations and
customer service, but not necessarily with respect to NPL resolution. Private equity and asset
management firms can specialise in the operational and/or financial restructuring of viable
borrowers and the maximisation of collateral value collection.
138
The opposite effect that originating banks can recover a higher value than servicing firms is
claimed in a study with US mortgage funds in Thao Le (2016).
124
servicer can threaten more aggressively to enforce the loan139
or the debtor may perceive
such a threat when he is informed about the change of creditor.140
Why are loan servicers important for NPL market?
Loan servicing firms become a key player when the loan owners do not have the size
and/or capabilities to cope with all the activities loan servicing requires. Loan servicing
helps, also, when tighter financial regulation and increased capital requirements force
financial institutions, mainly banks, to reduce their exposure to non-performing loans
(NPLs). Thus, loan servicing provides an essential link between the capital market
investors and ultimate borrowers.
In order to repair their balance sheet, banks can sell part or their entire portfolio of NPLs
to external financial actors (non-bank): investment funds. These funds are interested in
the return such portfolio of NPLs could add to their business, but they lack the expertise
on loan servicing that banks have in house. Then, the new owners of the loans need to
hire a loan servicer. This could be either the bank selling the NPLs or an outsourcing
company. To avoid the contamination that past wrongdoing by the banks that originated
the loans could produce, the new loan owners usually choose loan servicing companies
without relation with the loan originator, non-bank servicers. Besides, the new loan
owners can increase loan recovery if they focus on loss mitigation to improve recovery
ratios and to reduce time for cashing the loan. However, handling NPLs through loss
mitigation requires discretion, expertise and a huge amount of manpower.141
Then, expanding NPLs secondary market requires a robust third-party servicing industry
to support investment funds participation. Thus, the growth of non-bank servicer industry
in the US was driven by the banks' difficulties in managing their portfolios on NPLs.142
Non-bank services advantages over in-house banks services come from their
specialization on servicing NPLs and from their ability to reduce costs using
technological innovations.143
What kind of loan servicers do we have in the EU Member States?
Many of the loan servicers in the EU are part of an investment group either because the
investment company bought the loan servicer or because the loan servicer grew to
139
Banks face stronger reputation effects with respect to new lending business if debtors perceive
their enforcement policy against other debtors as unfair.
140
See Experian (2017).
141
Levitin and Twomey (2011).
142
Federal Reserve Board et al., (2016).
143
Federal Reserve Board et al., (2016).
125
become an investor itself. There are at least 47 companies offering loan servicing in the
EU. Out of the 47, 40 deal with non-performing loans, 35 deal with performing loans and
only 5 monitor a subservicer. Besides, 33 out 47 deal with residential mortgages, 37 with
commercial mortgages and only 7 are in the business of asset finance. At the end of
2016, our best estimate of the volume of loans under management by these loan servicers
in the EU is about EUR 508 billion.
We identified loan servicers in all countries of the EU, but Cyprus and Malta. On the
other hand, UK and Italy are the countries where we countered most loan servicers, 24.
Germany, Spain and Ireland have 15 or 16 loan servicers operating in their countries.
Netherlands, France, Poland, Belgium, or Luxembourg have 5 to 8 third-party loan
servicers. The rest of the countries have a number of loan servicers inferior to 3.
The financial group that serves most countries of the EU is EOS headquartered in
Germany. It is present in 18 out of 28 EU MS. Others groups with present in more than
10 countries are Intrum (recently merged with Lindorff) and Hoist Finance, which are
present in 13 and 11 countries respectively. There are 9 groups that provide loan
servicing in 5 or more EU countries but less than 10. Finally, there are 20 out of the 47
financial groups identified that provide loan servicing just in 1 EU country.
Relative to the stock of outstanding NPLs, the number of loan servicers is small in IT,
EL, FR, PT, CY and possibly ES and AT (see Figure A.5.5).
Figure A.5.5: Number of loan servicers and NPLs per Member State (The right-hand chart zooms in on smaller
Member States)
Another issue is the location of the headquarters for these groups. Thus, 15 out of 47
groups are from the USA, 9 are headquartered in the UK and the same amount in Italy, 3
from Sweden and from Germany; finally there are 2 groups from Australia, Netherlands
and Spain.
Public information about profitability of these servicers is scarce. The Orbis database
provides information about the profit margin of some of these groups in 2016, though not
of the profitability of their loan servicing activity. Thus, among those groups where we
have been able to calculate their profit margin the average value is 18% per year. The
group with the highest profit margin was Blackstone that owns the loan servicer
Acenden, with a 55% profit margin. Other groups with relative high profit margins were
126
Apollo, KKR, Oaktree or Charter Court with profit margins above 40%. Even though we
have incomplete data, our best approximation for the assets under management of these
groups is well above EUR 1200 billion in 2016.
Figure A.5.6: Profitability of firms offering loan servicing
Source: Company reports (see appendix).
While average Assets under Management of the 16 EU firms in this panel are 1.5 billion
EUR, they are 4.7 for the 12 foreign-owned EU firms. The latest profit data (which may
cover different time periods depending on the reporting date) were on average 13% for
the EU firms in the panel and 22% for the foreign-owned firms. The positive relationship
between size and profitability may be caused by the importance of data procession and
the translation of experiences made with business practices in one Member State to
another one. The pattern is less evident for EU firms, even if some of them are active in
several EU Member States.
Cost structures in loan servicers
The public consultation and self-reported information from market participants suggest
that EU Loan servicers are locally set with very heterogeneous environment that depends
on Member States' national regulations (see Annex 3.2). The benchmark if loan servicers
where homogenously regulated at the EU level could be what has happened in USA.
Thus, Dodd Frank financial reform in USA prompted Banks to reduce their in house
mortgage servicing that were acquired by Non-bank specialty servicers at a pace faster
than their ability to handle the increased volume. Thus, non-banks' market share of USA
loan servicing increased from 15% in 2008 to more than 33% in 2015.144
The Federal
Reserve Board report (2016) argues that the banks difficulties managing their portfolios
of NPLs along with enforcement actions and settlements on defaulted loans are the key
drives of such a growth by non-banks. Third-party loan servicers were able to benefit
from their specialization on servicing non-performing loans and their ability to harness
technological innovation to reduce costs.
144
Federal Reserve Board (2016)
127
Such growth generated a considerable operational risk for loan servicers. Thus, subprime
servicing industry was essential for development of the secondary market in subprime
mortgage loans but at the same time, the accelerated growth of servicers facilitated the
deterioration of the quality in subprime lending and securitization with a non-forecasted
influence that servicers had on mortgage termination ((McNulty et al, 2017). Then,
McNulty et al (2017) argue that the failure to regulate mortgage loan servicing is one of
the causes of the USA bank failure. Servicers need to be held to a high standard. Public
Administration has a role in consumer protection based on asymmetric information and
market power. The borrower does not choose their mortgage servicer and cannot make
changes if they don't like the servicer. (McNulty et al, 2017). In the USA case, it was not
a good solution to split supervisory responsibility on loan servicers over several agencies.
If the responsibility is split is possible that neither agency have incentives and/or
resources to develop major expertise in the topic. (McNulty et al, 2017).
The recent regulatory requirements by USA Congress and regulatory agencies to improve
the quality of servicing have skyrocketed loan servicing costs due to the introduction of
complexity and the lack of a harmonized and unified set of practical standards and
requirements (Housing Finance Policy Center, 2017). According to a panel of experts on
loan servicing in the USA, the direct costs of servicing a performing loan per year has
gone from $58 in 2008 to $164 in 2012, $205 in 2013, $170 in 2014 and $181 in 2015.
The main reason for the increases in direct costs is compliance because significant
regulation and legal complexity if a big part of this business (Wheeler, 2015). However,
loan servicing NPLs is a much labour intensity activity which translates into direct costs
of servicing these loans that are more than 10 times the costs of servicing performing
loans. Besides, the direct cost of a non performing loan per year has increased four times
to what it cost to service 4 years ago. Its direct cost in 2015 was $2386 while it was $482
in 2008. Mortgage loan servicing is a business where scale increases profitability.
Table A.5.8: Loan servicing costs in the USA
Annual average servicing costs (USD) in USA per
loan
2008 2009 2010 2011 2012 2013 2014 2015
Servicing cost per Performing loans (USD) $58.00 $77.00 $90.00 $96.00 $164.00 $205.00 $170.00 $181.00
Additional cost of servicing NPLs $424.0
0
$626.0
0
$806.0
0
$1,266.0
0
$1,845.0
0
$2,152.0
0
$1,779.0
0
$2,205.0
0
Source: Federal Reserve Board (2016).
The reason for the differences in servicing costs between performing and non performing
is because the direct costs associated with NPLs include the cost traditionally associated
with performing loans: call center, technology, scrow, cashiering, quality assurance,
investor reporting and executive management, etc, most of them able to automatize; plus
the costs specific for non-performing loans: collections, loss mitigation, bankruptcy,
foreclosure and post-sale, unreimbursed foreclosure and real estate owned losses, and
other default specific costs. Then, we observe that servicing NPLs is much more
expensive and the costs associated to those loans have been growing in the USA at a
faster pace that the cost of servicing performing loans (see Table).
128
Table A.5.9: Changes to loan servicing costs in the USA
2009 2010 2011 2012 2013 2014 2015 2015-2008
% change in servicing costs performing loans 32.76% 16.88% 6.67% 70.83% 25.00% -17.07% 6.47% 212.07%
% change in servicing costs NPLs 45.85% 27.45% 52.01% 47.50% 17.32% -17.31% 22.42% 395.02%
Source: Mortgage bankers association. Federal Reserve report
The structure of costs in a loan servicer can be divided between: Personnel 65%,
Technology 30% and Ancillary 5%. Then, labour cost management, technology and
innovation are essential to improve loan servicers efficiency (Accenture, 2016).
However, such cost structure depends on the number of loans serviced. Thus, The
Federal Reserve Report to the USA Congress shows a U behaviour for a mixture of
performing and non-performing loans. Having servicers that deliver their services to a
large number of loans improves their efficiency but a limit. For instance, if the EU
homogenises its rules on third-party loan servicers it could be possible to take advantage
of the economies of scale (Oliver Wyman, 2016).
Table A.5.10: Loan servicing costs and their determinants by firm size in the USA
Number of loans servicing less than 2,500 2,500 to 10,000 10,000 to 50,000 Greater than 50,000
Dollar cost per servicing a
performing loan in USA, 2015
$255.00 $171.00 $218.00 $243.00
% in Personnel 37.65% 44.44% 42.20% 47.33%
% in Occupancy and equipment 2.75% 2.34% 4.13% 3.29%
% Technology 0.78% 2.34% 3.67% 4.12%
% Subservicing fees 54.12% 40.94% 32.11% 21.40%
% Other expenses 4.71% 9.94% 17.89% 23.87%
Source: Mortgage bankers association. Federal Reserve report
Then, the servicer needs to get fees that are higher than its costs to be profitable. The
servicing fee is a fixed percentage of the unpaid principal balance (UPB) of the
underlying mortgage. The servicer may receive ancillary fees (late fees and loan
modification fees) and interest earned on principal and interest and taxes and insurance
collected and held by the servicer before distribution to the loan owner.
129
APPENDIX: STATISTICAL OVERVIEW ABOUT THE LOAN SERVICING MARKET
Table A.5.A1 Servicing companies in each EU MS
Country number of loan servicers AuM (EUR
mll)*
AT Austria 3
BE Belgium 5
BG Bulgaria 2
CY Cyprus 0
CZ Czech Republic 2
DE Germany 16 € 44,639.00
DK Denmark 3
EE Estonia 1
EL Greece 10
ES Spain 17 € 12,707.00
FI Finland 1
FR France 7
GB Great Britain 24 € 135,670.00
HR Croatia 2
HU Hungary 3
IE Ireland 14 € 113,300.00
IT Italy 24 € 201,274.00
LT Lithuania 1
LU Luxembourg 6
LV Latvia 1
MT Malta 0
NL Netherlands 11
PL Poland 5
PT Portugal 3 € 370.00
RO Romania 3
SE Sweden 3
SI Slovenia 1
SK Slovakia 2
* Information on Assets under management (AuM) is not available for all countries and for all loan
servicers.
Source: Banca IFIS, EMEA service evaluation industry report by S&P and companies' webpages.
130
Table A5.A2 Specialization of the main loan services in the EU MS
Primary Special Master
Asset
finance
Commercial
mortgages
Residential
mortgages
Apollo non performing loan group X X X X
APS X X X X
Arrow Global Group X X X X X
Axactor X
Bain Capital X X X
Blackstone (Acenden) X X X
Capita Asset Services X X X X X
CBRE loan services X X X
Cerved X X X X
Charter Court (EME) X X X X X
Computershare (HML) X X X
Cortland Capital Market Services X X
Cribis Crecit Management X X X X
Davidson Kempner (PCS) X X X X X
Dea Capital (SPC Credit Management) X X X X
FBS X X X X
Finsolutia X X
Fortress X X X X
Hipoges Iberia X X
Hoist Finance X X X
Intrum X X X
JB Capital Markets (SAM) X X X
K.Red (Non Performing Loans spa) X X X X
KKR X X X X
Link financial outsourcing X X X
Loancos X X X
Lone Star X X X X
Lowell (GFKL Financial Services) X X
Mount Street Loan Solutions (MSLS) X X X
Officine CST X X X X
Pepper Finance Corp. X X X X
Primus (Centaurus Credit Recovery) X X X
Quion X X X X
Securitisation Services X X X X
Situs X X
Solutus Advisors X X
Stater X X
Tages (Credito Fondiario) X X X X X
Target Servicing X X X X X
Varde (Guber) X X X
Vesta X X X X
Wells Fargo CMS X X X
Source: Banca IFIS, EMEA service evaluation industry report by S&P, Orbis database and companies'
webpages
131
Table A5.A.3 Characteristics of the main integrated groups of investors and loan servicers in EU
Company HeadQ. AuM Employees Profit
margin
Profit per
employee
Avge cost
employee
Total assets per
employee
EU
MS
EUR mill 16 % in 16 th EUR 16 th EUR 16 th EUR 16
Computershare (HML) Australia € 32,509.67 17,839 12.34 12 € 201.00 2
Pepper Finance Corp. Australia € 18,600.00 315 18.83 21 € 94.00 4
APS Holding Czech € 5,300.00 9
Loancos Germany na 1
Palmira Germany € 1,200.00 6
EOS Group (Contentia, Credirect)) Germany € 4,565.00 15 18
Target Servicing India € 6,439.56 445 10.01 11 € 67.00 1
Cerved (Fin S. Giaco.; Recus; Tarida) Italy € 12,000.00 160 39.32 88 € 211.00 1
Cribis Crecit Management Italy € 1,000.00 41 14.86 82 € 643.00 1
Dea Capital (SPC Credit Mnt.) Italy € 173.50 186 14.5 68 € 3,768.00 1
FBS Italy € 7,410.00 1
K.Red (Non Performing Loans spa) Italy € 1.00 4 7.78 20 € 224.00 1
Officine CST Italy € 2,000.00 1
Primus (Centaurus Credit Recovery) Italy € 3,600.00 1
Securitisation Services Italy € 20,500.00 1
Tages (Credito Fondiario) Italy € 4,200.00 1
Quion Netherl. € 26.00 365 25.4 45 € 71.00 2
Stater Netherl. € 86.00 826 6.34 13 € 104.00 2
Hipoges Iberia Spain € 5,800.00 1
Finsolutia Spain € 725.00 45 38.99 48 € 124.00 2
Axactor (CS Union) Sweden € 232,000.00 988 -32.01 -14 25 € 324.00 5
Hoist Finance (TRC) Sweden € 1,300.00 1,285 23.95 43 € 1,560.00 11
Intrum (Lindorff) Sweden € 3,352.00 8,000 19.37 71 € 1,055.00 13
Lowell (GFKL Financial Services) UK € 16,000.00 1
JB Capital Markets (Savia Asset M.) UK € 2,700.00 90 0.66 1 € 1,025.00 1
Vesta UK € 500.00 1
Charter Court (Exact Mortgage Ex.) UK € 21,000.00 370 52.42 154 € 13,113.00 1
Solutus Advisors Germany UK € 1,503.55 13 -66.18 € 291.00 2
AnaCap Financial Partners UK € 3,200.00 23 34.64 388 438 € 509.00 2
Capita Asset Services (Capita M. S.) UK € 111,959.34 4
132
Arrow Global Group (Zenith Service) UK € 41,000.00 1,135 13.3 32 32 € 1,077.00 5
Link financial outsourcing UK € 4,318.68 550 17.42 15 € 104.00 5
Davidson Kempner (Prelios C. S.) USA € 9,680.00 1
Fortress (Italfon., Dobank, UCCMB) USA € 72,400.00 464 18.35 70 € 735.00 1
Cortland Capital Market Services USA na 3 -17.97 -8 € 160.00 1
Wells Fargo Comm Mortgage S. USA € 1,263.74 269,142 36.25 113 € 6,803.00 1
Mount Street Loan Solutions (MSLS) USA € 25,000.00 37 32 171 € 451.00 2
Blackstone (Acenden) USA € 12,051.87 2,120 55.53 1066 € 11,815.00 2
Bain Capital (Heta Asset Resolution) USA € 34,300.00 3
Cargill (Carval Investors) USA € 10,000.00 18 -7.21 -80 € 616.00 3
Lone Star (Hudson Advisors UK) USA € 17,464.85 3
KKR (Sistemia) USA € 40,000.00 1,200 51.11 771 € 30,834.00 4
Apollo Global Mment (Apollo NPL G.) USA € 151,000.00 986 53.85 1021 817 € 5,416.00 4
Varde (Guber) USA € 50,000.00 5
CBRE loan services USA € 117,391.30 75,000 6.74 11 € 136.00 6
Oaktree USA € 86,086.96 900 43.15 6
Situs (Hatfield Philips) USA € 32,000.00 6
Source: Banca IFIS, EMEA service evaluation industry report by S&P, Orbis database and companies'
webpages
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ANNEX 6: THE REGULATORY FRAMEWORK OF NPL TRANSFERS AND LOAN SERVICERS
1. A STOCKTAKE OF RULES IN THE EU MEMBER STATES: RESULTS OF THE
QUESTIONNAIRE TO MEMBER STATES
Within the context of efforts to improve the functioning of secondary markets for
distressed debt and to facilitate the disposal of non-performing loans (NPLs) by banks,
the Commission sent a fact-finding questionnaire to Member States in April 2017 in
order to gather information on servicing of loans by third parties and transfer of NPLs.
Replies to the fact-finding questionnaire have been received from 25 Member States
(MS). This text summarises the replies and represents a stock take of rules in place.
1.1 Executive summary
Most Member States lack legal definitions of loan servicing activities and concerns
regarding consumer protection affect differently the activities that may be considered
loan servicing. In many cases, a set of core activities performed by the creditor are
defined by law and outsourcing them is generally allowed only under strict conditions
such as an authorization by the competent authority or that the creditor remains, to some
degree, responsible for the activity. Therefore, the particular activities that can be
outsourced differ across countries.
In the large majority of Member States, there are no specific requirements for loan
servicers when they enter the market, although in order to manage the loan, some
countries require either a full or restricted banking license or compliance with some fit
and proper criteria. Non-EU loan servicers are permitted in almost all Member States and
they do not face additional requirements.
Member States have in general a favourable legal environment for NPL transfer and the
entry of specialised investors. First, there is at least one type of contract in each Member
State that can allow the transfer of loans without the debtor's consent. When consent is
required, it is usually possible to provide it in abstract in the loan documentation and
most loan contracts seem to make use of this possibility. Member States have indicated
neither a separate consent for the transfer of the collateral, nor additional obstacles to
transfer a loan when it is subject to enforcement actions.145
The transfer of NPLs to non-
financial institutions is also allowed in all MS, except one. Lastly, notification to the
debtor is required in ten MS, and it is a standard practice even in those countries where it
is not mandatory.
The Member States' responses to the questionnaire do not reveal severe additional
regulatory requirements to the transfer of loans. Some types of loans, namely consumer
145
In-court and out-of-court foreclosure proceedings.
134
credit or loans under a certain value face some stricter requirements on the buyer due to
consumer protection provisions. In addition, the buyer is required in some cases to get a
banking license. The transferor does not encounter further regulatory barriers either,
although some Member States require an authorisation in case of significantly large
transactions due to competition law or financial stability concerns. The questionnaire has
not revealed that investment funds face any restrictions when they acquire NPLs beyond
some general rules to protect retail investors.
Responses suggest that bank secrecy and data protection can be a barrier to share data for
due diligence, however the legal framework of most Member States generally contains an
exemption that allows the bank to disclose data which are necessary and proportionate
for selling the loan. Moreover, where the debtor gives consent, which seems to be a
standard practice, banks have more leeway to disclose personal information.
These results are consistent with the ECB Stocktake of national supervisory practices and
legal frameworks related to NPLs (See Appendix). It should be noted however, that they
reflect authorities views and our reading of what the rules intend. Market participants'
perception of regulatory entry barriers and their effectiveness may differ and therefore it
is warranted to cross check the conclusions with the replies from the currently running
public consultation.
1.2 Background
Within the context of efforts to improve the functioning of secondary markets for
distressed debt and to facilitate the disposal of non-performing loans (NPLs) by banks,
the Commission sent a fact-finding questionnaire to Member States on 7 April in order to
gather information on their respective relevant national legal provisions.
The aim was in particular to obtain information on:
1. servicing of loans by third parties and non-bank loan investors, and
2. transfer of loans, including non-performing loans, to bank and non-bank entities and
these entities' subsequent ownership and management of these assets.
Within the context of the discussions in the FSC Subgroup on NPLs it was deemed
necessary to investigate whether legal provisions might restrict the above mentioned
activities in some Member States. Such restrictions may include rules for the transfer of
credit contracts or restrictions applicable to purchasers of NPLs. In some cases, the
transfer of a loan might only be possible with the debtor's consent. Likewise, access to
information concerning the loan and/or the borrower may be restricted, for example due
to considerations of data protection. Limitations can also apply to potential buyers by
requiring a banking licence or by imposing other restrictions. The availability of NPL
servicing also plays a role in the development of secondary markets for distressed assets.
National rules, including licencing rules, governing the provision of third-party loan
servicing, currently vary between Member States.
135
1.3. Assessment of answers to the questionnaire
1.3.1 LOAN SERVICING ACTIVITIES
1.3.1.1 Legal definitions of loan servicing activities
In most Member States, there are no formal legal definitions of 'servicing', 'managing'
and/or 'debt collection' of loans, neither of other ancillary activities undertaken by banks
after the granting of the loan. Loan servicing activities primarily fall under the freedom
of contract.
Some Member States do put forward certain definitions/descriptions. EE establishes
minimum requirements for loan servicing, which involves activities of granting loans,
analysing, monitoring and evaluation. IE defines “credit servicing” as “managing and
administering the credit agreement". The EL law146
stipulates the indicative content of
the management /servicing activities for NPL servicing companies as the legal and
accounting monitoring, collecting, conducting negotiations with debtors. In LV, debt
recovery activities fall under dedicated definitions and are regulated.147
In the UK, a
distinction is made between regulated mortgages (‘mortgage administration’148
) and
consumer credit with definition for 'debt collecting' and 'debt administration'.
1.3.1.2 Potential requirements on the outsourcing creditor149
In almost all Member States, there are no explicit prerequisites that a creditor has to
satisfy before outsourcing certain servicing functions. As a general rule, it is not
permitted to outsource core activities, which may be subject to a banking license and
regulatory supervision, albeit these core activities differ depending on the Member State.
If a subset of servicing functions is to be outsourced, there are general provisions on
outsourcing applicable in the majority of Member States. For instance, the creditor is
expected to assess whether the firm to which it outsources fulfils fit-and-proper criteria
and compliance with the most relevant rules applicable to them (anti-money laundering,
customer protection regulations, etc.). The creditor remains liable for any breaches by the
provider of outsourced services of any regulatory requirements in relation to the
servicing of the loans (e.g. in IE, DK, NL). Furthermore, there are often minimum
requirements in terms of risk management (e.g. in DE, IE, EE).
146
Law 4354/2015.
147
“Law n Extrajudicial Recovery of Debt” regulates the rights and duties of a creditor and a provider of
debt recovery services in the field of debt recovery.
148
The related law essentially covers notifying and collecting the amounts due and taking necessary steps
to ensure payment of these
149
Either the originator or an investor who have acquired the credit claim after inception
136
In EL, if the outsourcing creditor is not a supervised bank of financial institution, it can
outsource only to a servicing company that is properly licensed and supervised by the
Bank of Greece.
If outsourcing is deemed to affect core functions or services, it is not allowed or tied to
strict requirements. For instance in DE, loan monitoring can only be subject to
outsourcing if concrete criteria are defined for such activities; however credit decisions
cannot be outsourced. In ES and MT, outsourcing of core activities requires authorisation
by the competent authority. Some Member States do not allow to outsource refinancing,
which is considered part of a credit/lending decision (e.g. in DE) or they require strict
conditions to the outsourced institution (e.g. in RO).
As regards undertaking formal enforcement actions, in the large majority of Member
States the creditor cannot outsource. Investor-linked servicers are not permitted to
undertake formal enforcement actions on the creditor’s behalf. In EL, however, loan
servicers are entitled to all necessary legal remedies and can proceed to any other judicial
action for the collection of the debts under their management.150
1.3.1.3 Potential requirements on the loan servicer
In the large majority of Member States, loan servicers are not legally required to comply
with specific requirements. Loan servicers are in the vast majority of Member States
neither required to obtain a full (except for SK, RO and NL in some cases) 151
nor a
restricted banking license (except for HU and FR). In almost all cases, servicers do need
to comply with certain fit-and-proper requirements. In IE and EL, servicers are required
to comply with specific requirements and only entities that have an appropriate licence
can conduct credit servicing. In LV, a provider of debt recovery services requires a
special license. In the UK, the servicer of mortgage loans and consumer credit is required
to meet some fit-and-proper criteria.152
EL explicitly requires loan servicers to follow
consumer protection including special care for the socially vulnerable groups.
Non-EU loan servicers are permitted in almost all Member States, except EL and they do
not face additional requirements. In EL, non-EU loan servicers are not permitted and
non-Greek EU loan servicers must act through a branch. Nonetheless, in AT, in case of
pure outsourcing, stricter requirements can apply especially with regard to data
150
Servicing companies will appear as non-beneficiary (third) parties in court proceedings and any relevant
judgement shall be binding upon the lenders of the relevant loans.
151
Servicing of a loan is considered as a banking activity. In fact, the bank that transferred the loan to a
third-party is allowed to continue performing the servicing of the claim, if its banking license
allows for the management of claims on behalf of clients, including advisory services. RO only
regarding refinancing since it is considered lending activity.
152
I.e. certain “fit and proper” criteria, specific form of incorporation, location of headquarters or
incorporation, the ability to meet operational requirements and the ability to meet specific
compliance and audit requirements.
137
protection issues, as the legal situation outside the EU is less harmonized. Whereas there
are no explicit restrictions for non-EU loan servicers in SE, the supervision of the data
protection authority may create a practical obstacle for some non-EU firms.
When a licensing/permit requirement exists on the part of the servicer, the exact criterion
triggering the related procedure differs from one Member State to another. In IE, an
authorisation is required when a firm is servicing loans on behalf of an unregulated
entity. In EL licensing requirements differ between “simple” servicing companies and
those that provide refinancing. In AT, factoring requires a licence, because the purchase
and the acceptance of the risk associated with such receivables are decisive. In HU, the
trigger is when a commercial activity is involved.
In Member States where third-party servicers need to go through a licensing process, the
timeline differs from one country to another: 1 month in LV, 2 months in EL, ca. 3
months in AT, 5 to 6 months in HU. The UK has a statutory deadline of 12 months for
deciding on submitted applications for regulatory permission. In IE, it is not possible to
define timelines as yet, as the country's new authorisation regime was introduced only in
July 2015.
Authorities that have the ability to grant licences to third-party servicers are the Member
State's Central Bank (CY, HU, IE, EL), the Consumer Rights Protection Centre in the
case of LV, the Financial Market Authority in AT, and the Financial Conduct Authority
in the UK. In SE, the data protection authority also has a role.
The type of documentation required for any licensing application can be very diverse.
This can entail generic information disclosure requirements (e.g. in CY, IE, LV, UK,
HU), such as a description of the services, details of the service provider, the business
plan, compliance plan, internal audit plan, specific conditions of the contract. EL
prescribes a minimum capital paid in (EUR 100.000 for simple servicers and EUR 4.5
million for those that provide refinancing). On top of such general information, more
details can be required about, for example, the amount of initial capital freely available
(AT), or qualifying shareholder information (AT, IE). HU requires financial institutions
applying for authorization to enclose (in addition to more general information): the
proposed area of operations, a minimum amount of the initial capital for credit
institutions. Furthermore, if the applicant is established abroad, a number of extra
requirements are in place, e.g. a statement on having a main office in Hungary from
which governance of the financial institution takes place.
1.3.2 Transfer of Loans
1.3.2.1 Civil law provisions on the transfer of loans
In principle, all Member States have at least one type of contract (either transfer of the
credit rights or transfer of the loan contract) that allows the transfer of loan without the
debtor's consent. Under the freedom of contract, debtor's consent can be either stipulated
in the contract or exempted when it is required. When consent is required, it can be
provided in standard forms and both in abstract at the time of the loan and at the time of
the transfer (LT holds that consent in abstract would be legally problematic). Those
138
Member States that differentiate between the transfer of the credit rights (or receivables)
and the more common transfer of the loan (or all the rights and obligations of the
contract) require the debtor's consent for the latter (ES, PT, FR, IE, SI, AT, DE). As a
rule, Member States would provide that the debtor shall enjoy the same legal position
vis-à-vis the transferee of the loan than against the transferor. The only countries where
debtor's consent is generally required by operation of law are SK and BE. Nonetheless, in
SK, if the debtor has been more than 90 days in arrears (NPLs), consent is not required.
In BE, if both assignor and assignee are financial institutions that transfer big portfolios
of loans, debtor's consent will be overridden by an authorization from the competent
authority. BG prohibits the transfer of consumer's credit loans unless already envisaged
in the contract.
The collateral is generally transferred with the loan, thus it does not require a separate
consent (SI requires consent when the collateral is in transferor's possession). There are
no problems to transfer the loan when it is subject to enforcement actions (Only UK
requires the court's approval). The transfer of NPLs to non-financial institutions is
allowed in nearly all MS with the sole exception of CY that only permits to sell the loans
to banks and financial institutions as eligible buyers).
The validity of the transfer of the loan seems to require notification in PT, CZ (when it is
pledged), EE, BG, HU, SK, CY, FI, HR, IE (2 months in advance for loans that affect
individuals and SMEs) and EL (the main terms must be registered with the competent
Pledge Registry and following such registration, the borrower and, if applicable, any
guarantor should be notified). In the rest of countries, notification is not mandatory,
albeit the transfer of the loan does not produce effects against the debtor without it. The
consequence would be that either the payment to the first creditor would discharge the
borrower's debt or the transferees could not enforce their rights against the debtor.
Therefore, debtor's notification is standard practice even in those MS where notification
is not mandatory.
In general, the transfer of the collateral rights does not require a specific form.
Nonetheless, if the collateral is registered because it is pledged or it is a mortgage loan,
the transfer of the collateral in some MS requires access to the register as well (PT, IE,
BG, DK). Other MS require the same specific form as the loan contract (SI, LV, LT). In
some MS, there are ways to transfer the loan without a specific form, but the notarial
certification and registration is either a general practice or it is required to have access
and benefit from the previous registration (ES, FR, DE, CZ, BE, AT). Some MS declared
that their laws do not require any specific form (UK, FI, SK, EE). In HU, there is not a
specific form, unless the loan portfolio is above HUF 1bn.
1.3.2.2 Potential regulatory requirements and restrictions on the transferee/buyer
Although some countries require banking licenses when the loans are performing (FR,
PT, SK, LT), NPLs are exempted. Nine Member States (HR, ES, FI, IE, DK, SK, PT,
LT, UK) hold that the buyer of NPLs does not encounter additional regulatory
constraints. Some additional specific requirements can be triggered depending on the
139
type of loans (consumer credit or loans under a certain threshold) due to consumer
protection provisions (SI, BE, SK, NL) or the nature of the activity (credit business or
factoring) (DE, AT). Three Member States (BG, RO, EL) require fit and proper criteria,
including a specific form of incorporation and the location of either head offices or a
branch in the country. EL requires investors to sign a loan management agreement with a
servicing company properly licensed and supervised by the Bank of Greece (see above).
HU requires a restricted banking license and CY a full banking license. Thus potential
licensing/permit requirement may be required because of the buyer's commercial activity
in five Member States (DE, AT, EE, SK, BE). The type of loan could also trigger some
specific requirements (SI, BE, SK, BG).
Non-EU institutions face the same requirements as EU-domiciled investors in the
majority of MS. EL requires foreign firms to operate in the country through a local
branch and neither being from a tax haven nor from a non-cooperating country.153
Other
exceptions are AT, HU, and BE (in case of companies domiciled in a tax haven), but they
did not give further details in their reply.
1.3.2.3 Potential regulatory requirements on the transferor
Only three MS (BE, HR, LV) require authorisation on the transferor by the supervisor
authority. Nonetheless, other countries require authorisation under some conditions (HU,
DK, AT, LT) such as the volume of the deal (HU), competition law concerns (AT, LT) or
both parties are financial institutions (DK). Getting approval from the supervisor, when
required, lasts between one (LV) and six months (AT). Although Member States are not
very concise about the requirements that trigger the authorisation, it is possible to
identify transferees' book and market value (HU) and financial stability risks (HU and
BE).
It is possible to identify other additional regulatory constraints on the transferor. First, IE
requires a notification to the debtor two months in advance for some type of loans
(natural persons and SMEs) due to provisions on consumer protection. Secondly, CY
permits both the debtor and the guarantor to submit a proposal to purchase the loan 45
days after the notification. A third factor is data protection and bank secrecy as
mentioned below.
153
according to Greek tax law 4172/2013.
140
1.3.2.4. Role of investment funds to buy loans154
In most Member States, loans are eligible assets for alternative investment funds (in the
meaning of AIFMD). In BG national investment funds cannot invest in NPLs, although
AIF under the threshold of the AIFMD have no restrictions. In HU, loans are only
eligible forms of investments if they are in the forms of derivative instruments and only
UCITS are entitled to buy loan-based derivatives. There are special funds in SE that
market shares to retail investors, which are not allowed to invest in loans.155
Both open-ended and closed-ended funds are authorised to buy loans with the exceptions
of BE and FI where only closed-ended funds are entitled. In ES, closed-ended funds can
invest in participative loans only under some conditions and up to certain thresholds. The
particular legal forms of the funds are quite different in every Member State and they
adapt to the different legal traditions.
It is common that only institutional/professional investors are permitted to invest in loan-
participating funds. However some Member States entitle non-professional investors
when they invest an amount above a certain threshold (€20.000 in LV, €100.000 in ES
and CZK 1 million in CZ). Some Member States (ES, DK, DE) also extend this
investment option to non-professional investors under strict conditions such as signature
of risk knowledge or investment limits.
Managers of large alternative investment funds (in excess of AIFMD requirements) do
not encounter specific minimum capital or other additional regulatory constraints, such as
governance requirements, legal structures or restrictions to the outsourcing to third-party
servicers in most Member States. However, PT imposes some fit and proper criteria on
managers and it requires some legal corporate structure to the funds such as a
management body, a supervisory body and an external auditor. Managers and funds in
ES and DE shall comply with some governance requirements and investor protection
regulations if they want to become entities supervised by the competent authority and
enjoy tax advantages. In all Member States, the relevant investment funds are supervised
by either the financial supervisory authorities or Central Banks.
Lastly, although there are some differences across the EU, the timeline for the
authorisation or registration process of the relevant investment funds lasts between 20
working days and 6 months depending on the type of fund. In addition, most Member
States did not report any specific tax provisions in place which may restrict and/or
154
A number of Member States (MT, UK, SK) did not submit any answer to the questions related to the
role of investment funds to buy loans.
155
These are AIF with permission from the Swedish FSA under the national regime to market shares to
retail investors.
141
disincentive the transfer/sale of loans as long as funds engage in pure investment
activities (in contrast to commercial activities).
1.3.3 Data protection and bank secrecy provisions
Another common pattern in Member States' replies is that the bank remains responsible
vis-à-vis the client for the treatment of the data when it outsources some activities to a
servicer. The Member States which are more specific on this hold that the creditor, in
most cases the originating bank, has to sign an agreement with the servicer that regulates
the use of personal data. The servicer shall not use the personal data for other purposes
than those established in such agreement. On the other hand, if the bank transfers the loan
and deletes all personal data, it is not responsible vis-à-vis the client anymore (ES, FR,
IE, AT, HU, FI, BE). Some MS hold that the bank retains responsibility when it transfers
the loan to entities which are not subject to bank secrecy (CZ, MT SK and LT). Three
MS (PT, SI and EE) only mention that the transferor retains responsibility vis-à-vis the
client but they do not specify how.
Bank secrecy provisions generally contain an exemption that allows the bank to disclose
data which are necessary and proportionate for selling the loan. In the case that the debtor
gave consent, which seems to be a general practice, the bank would have more leeway to
disclose personal data. This exception is explicit in HR and HU for the selling of
receivables. Other Member States hold that the disclosure of debtor's protected
information can in certain cases be considered as a legitimate interest of the transferor,
which would be an exemption to bank secrecy provisions according to their national law
(ES, FR, IE, RO, SI, DK, CY, FI, BE, MT, CZ). The strictest regimes appear to be in BG
and AT where the transfer of confidential data is only allowed under the debtor's consent
or an authority's decision.
It seems to be standard practice in most of MS that the seller describes the loan without
disclosing confidential and personal data in the initial transaction phase and may only
disseminate such information in a second stage or when the contract has been concluded.
Those who have access to confidential information must keep it confidential.
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2. OBSTACLES FLAGGED IN THE PUBLIC CONSULTATION
The public consultation preceding this impact assessment asked stakeholders to identify
obstacles to the development of secondary markets and to communicate their assessment
of the obstacles' importance to marekt development. This annex provides an overview of
the main obstacles emerging from the consultation responses. Following are the main
obstacles that came out of the consultation, organized around four main pillars: data
quality and availability; legal system & collateral enforcement; costs of entry & asset
transfers; and recovery expectations & disposal losses.
Table A6.1. Obstacles to the development of secondary market for NPLs
A. Data quality &
availability
B. Legal system &
collateral
enforcement
C. Costs of entry &
asset transfers
D. Recovery
expectations &
disposal losses
Banking secrecy Ability to obtain stay
on enforcement
Licensing
requirements for
investors & services
Collateral valuation
gap
Consumer privacy Right to settle at
transfer price
Cross-border
authorizations (non-
EU)
Regulatory approach
on provisioning
Standardization of data Efficiency of out-of-
court mechanism
Taxes & other costs
due to transfers
Tax disincentives on
provisioning
Cross-border
differences in
collateral enforcement
Economic conditions Impact on disposal
losses on regulatory
capital
Cross-border
differences in dunning
process
Social & political
resistence to collateral
enforcement
Judicial & operational
capacity
Source: EC Consultation Responses
2.1 Data quality & availability
The unavailability of high quality data has been picked as the main obstacle to the
development of secondary NPL markets by most respondents. The inability of a
prospective buyer to discern the quality of the assets, which is intrinsically known to the
seller, leads to an outcome where only the low quality assets, or "lemons", are traded.156
These information asymmetries lower bid prices, obstruct the price discovery process,
and may even impede altogether the development of a secondary market. To overcome
these challenges, prospective investors typically conduct a detailed review of the relevant
156
See G. Akerlof (1970) “The market for “lemons”: quality uncertainty and the market mechanism”,
Quarterly Journal of Economics, Vol 84, No. 3, pp 488-500.
143
portfolio prior to making an offer for the for-sale portfolio. Ideally, the analysis should be
similar to the credit risk and recovery assessments made by the banks originating the
loans, involving the assessment of the expected future cash flows, collateral realization
and costs related to servicing, selling, or enforcing the contract. Such an analysis is
usually hampered when investors lack access to data on payment histories, recovery
rates, or collateral valuations on comparable exposures.
Banking secrecy and consumer privacy issues are identified as the main reason for
the limited flow of information to buyers. As highlighted by one respondent, the need
to overcome the inherent information asymmetries has to be balanced with privacy
concerns. In many jurisdictions157
, banking secrecy rules prevent banks or other entities
managing credit exposures to disclose client-specific information to third-parties. This
effectively prevents the transfer of loan-specific data prior to a sale, unless valid client
consent is available, even when the loan is non-performing. The transfer of the portfolio
to another entity, such as securitization special purpose vehicles (SSPVs) or external
servicers, to conduct the pre-sale due diligence on behalf of the investors to circumvent
these rules against divulging client-specific information is deemed too costly, further
adding to the bid-ask spread.
The uniformity of the data on the NPLs and the underlying collateral are also
identified as an obstacle undermining general data quality. In some countries, banks
cannot transfer data outside the country, inhibit cross-border entry. Similarly, the non-
uniform nature of loan-level data on NPLs and legal documentations limit the gains from
economies of scale that would be available to international players. Several participants
welcome the renewed focus on achieving data uniformity at the EU level, but point at
areas that have not received adequate attention.158
For example, a number of respondents
identify the lack of comparable, reliable and granular information on real estate market
transactions as a major shortfall, rendering benchmark comparisons difficult.
2.2 Legal system & collateral enforcement
Most respondents identified lengthy and onerous legal procedures for enforcing
loans as a key obstacle to the development of NPL secondary markets. Lengthy and
costly enforcement procedures introduce legal uncertainty and lower the net present
value of the expected recovery proceeds, thereby driving up the bid-ask spread. Several
respondents highlighted that a major issue was the ability of borrowers to oppose and
157
According to evidence from the consultation responses, banking secrecy rules prohibit the transfer
of information prior to a sale of loans in Austria, Cyprus, Denmark, France, and Portugal. In
Czech Republic, Germany, Hungary, and Poland banking secrecy rules do not apply for non-
performing loans.
158
More recently, in its July 2017 action plan to tackle non-performing loans in Europe, the
European Council has invited the EBA, ECB, and the European Commission to propose by end-
2017 initiatives to strengthen the data infrastructure with uniform and standardised data for NPLs
and consider the setting-up of NPL transaction platforms. In line with this call, EBA has recently
developed NPL templates to take into account different data needs of potential NPL investors.
ECB has also worked on a broader loan-level data reporting project, which was adopted by the
ECB Governing Council in May 2016, to collect granular loan-level data (AnaCredit) for all loans
to legal entities and establish a shared database for the European System of Central Banks (ESCB)
starting with September 2018.
144
obtain stay on legal enforcement actions.159
Lengthy enforcement procedures also
increase the risk that the collateral may deteriorate in value, particularly for loans backed
by industrial plants or industrial warehouses. Borrowers whose loans were sold have the
right to settle their loans at the price of assignment, without distinguishing whether the
loan is performing or non-performing.160
In addition to unlocking NPL sales, addressing
these issues can also lower strategic defaults and incentivize borrowers to engage
voluntarily with creditors.
The efficiency of out-of-court procedures is also partly dependent on the ability of
creditors to enforce the collateral. If creditors can foreclose the collateral with relative
speed and reasonable costs, this can also incentivize borrowers to lower negotiate with
the creditor voluntarily, as in the case of out-of-court procedures. In many countries, the
out-of-court enforcements or sales, much like their legal counterparts, involve lengthy
notification periods. More importantly, in many member states161
debtors have the ability
to stall the process through legal action, which was identified as a main reason lowering
the use of out-of-court sales in Spain. One respondent highlighted that out-of-court
financial collateral agreements are made difficult as the borrowers have the ability to
request, and re-request) valuations by third parties.
Several respondents also noted that there are severe cross-border differences in the
legal procedures and their application. In particular, differences over the application of
legal foreclosures, insolvency procedures, consumer protection laws, as well as out-of-
court procedures constrain the gains from economies of scale for larger international
investors. National differences and legal impediments over the dunning process (i.e.
methodical communication with borrowers to ensure the collection of accounts
receivable) are also reported. The respondents also note that there are legal impediments
to access of the creditors to contact data of the debtors for non-creditors. As a whole,
these procedural differences make it difficult for cross-border investors and services to
automate and standardize the maintenance of NPLs.
The improvement of judicial and operational capacity could help improve recovery
expectations in certain regions. Small claims courts do not exist in some member
states, which undermines efficiency of the legal procedures for credit recovery and
lengthening the collection term and cost. The length of bankruptcy proceedings in certain
member states162
vary substantially depending on the assigned court, which are perceived
159
The issue of debtor protection in the case of NPLs was identified as a major impediment to the
further development of NPL secondary sales in Italy. In France, borrowers can insert terms to
limit the transferability of their debt at the time of origination. In Cyprus and Greece, transfer of
loans may require the explicit consent of the borrower, even in the case of non-performing loans.
In many jurisdictions, including most notably France, Cyprus, Ireland, Italy, and Spain, borrowers
have the ability to launch appeals, stays, or suspended evictions, in the event of any legal dispute.
160
Although, these practices aim to protect borrowers and avoid litigious claims in the case of sale of
performing loans, they severely undermine investor interest in the case of non-performing loans,
effectively limiting any potential benefits. In Spain, such provisions appear to exist in Navarra and
Cataluña (for residential properties), although their legality has been challenged.
161
According to evidence form the consultation responses pledgees have the ability to stall collateral
repossessions in Italy and various Spanish regions.
162
Respondents to the consultation identified Ireland, Italy and Portugal as countries where the length
of bankruptcy proceedings varies substantially.
145
to be due to differences in the capacity of those courts in dealing with NPL resolutions.
In addition, property appraisals conducted in the context of secured NPL securitisations
are characterised by high levels of uncertainty. Valuation uncertainty is driven partly by
the illiquid nature of the assets securing the loans. This uncertainty is exacerbated by
lengthy recovery procedures.
2.3 Costs of entry & asset transfers
Specific entry barriers and the inability of certain investors to purchase assets have
also been identified as important obstacles to the development of secondary
markets. To that extent, certain jurisdictions allow a sale of NPLs only if the investors
are financial entities or even banks, which inhibit entry from a wider spectrum of
investors.163
NPL transfers may also be subject to specific authorization requirements and
approvals of local authorities in the case where foreign entities are involved, which
increased transaction costs. These restrictions are at times more poignant for foreign, in
particular non-EU, investors.164
As noted above, in some jurisdictions the consent of the
debtor may also be sought prior to the transfer of assets. These restrictions are
particularly present for the transfer of retail NPLs. The presence of entry barriers and
transfer restrictions may impede investor interest and, at best, focus investors' interest in
sufficiently large markets where they may reap net benefits from obtaining the required
licenses and authorization.
In addition to licensing and authorization requirements, taxes on loan transfers
have been identified as a second impediment to the development of the secondary
NPL markets. There are a number of tax contingencies that may arise from the transfer
of loans. First, losses on asset disposals may not be tax deductible for the originating
bank and may give rise to taxable income for debtors.165
Second, in some countries asset
transfers may give rise to withholding taxes on interest income, stamp duties, or other
administrative costs, such as notarial costs and collateral registration fees.166
A number of respondents also highlight that local social, political and economic
conditions may also be important determinants of entry decisions for investors. The
underlying economic conditions are clearly an important factor for the expected value of
the NPLs. A lower unemployment rate and higher growth rate have a positive impact on
163
In certain jurisdictions, only entities holding banking licenses are allowed to buy NPLs, including
Cyprus, Slovenia (for consumer loans), and Germany (where further loan drawings may be
involved). In others, like Spain (for mortgage loans) and Hungary, only financial entities are
allowed to buy NPLs. In Italy, investors are able to invest in NPL portfolios only through a local
SPV supervised by the national authority. In Romania, investors have to be authorized by the
domestic Consumer Protection Authority.
164
In Germany, non-EU investors investing in NPL are required to establish a local German
servicing enterprise. One respondent complained that non-EU entities may face substantial
difficulty in Hungary to obtain local licenses and authorizations for managing NPLs, including
banking license and tax exemptions.
165
In Poland, disposal losses are tax deductible only if the relevant NPLs were enforced (i.e.
foreclosures) or if debtor was declared insolvent.
166
In Spain, stamp duties (Actos Jurídicos Documentados) and other administrative costs (i.e. notary
and registry fees) are seen by several respondents as the main obstacle to the development of
secondary market transactions.
146
cure rates, effectively increasing the expected returns for investors. Political conditions
can be determinant in two distinct ways. First, much like macro-economic conditions,
political stability can help ensure high future returns. Second, and perhaps more
importantly, collateral enforcement may be made difficult due to political and social
atmosphere. This is especially the case in countries enforcing loan contracts are seen as
putting people out of their homes, i.e. where retail mortgage NPLs are concerned, and
where there is a public perception of unfair practices or financial misconduct by banks.
To that extent, certain investors may be concerned with reputational risks arising from
the use of recovery procedures, including foreclosures or more intrusive collection
practices. Conversely, originating banks may also perceive NPL disposal harmful on
their existing relationships with their customers.167
The cost and availability of loan servicers has been identified amongst the entry
obstacles most participants. Third-party services represent an alternative for buyers of
NPLs to manage the loans and client relations. Having a third-party servicer also allows
the investors to sell the assets to other investors in the future, effectively providing them
an outside option. However, in some jurisdictions the servicers have to be licensed and
possibly supervised, much like the investors.168
As another key complaint, several
respondents noted that these requirements, apart from being onerous, differed
substantially, undermining the economies of scale advantages that many international
services rely on. Despite these concerns, however, several respondents note that debt
servicers are becoming more common-place across the EU, especially over the last two
years, embracing new asset classes.
2.4 Recovery expectations and disposal losses
Higher recovery expectations of the originating bank is seen by several respondents
as the main cause of a high ask price in the context of NPL sales. It is quite common
that buyer and sellers have different valuations of the underlying assets, especially in the
case of NPLs where data quality and availability issues may exist (see above). However,
valuation gaps may exist even in the absence of those issues. For example, the buyers and
the sellers may have different discount rates to discount the future cash flows, effectively
widening the bid-ask spread especially in countries where recoveries take substantial
amount of time. As another example, investors and originating lenders may have
different stances in assessing recoveries. Investors often aim to conduct a detailed and
"dispassionate assessment" of the expected recovery, relying exclusively on recent
collateral valuations, payment histories of lenders, and other forms of verifiable data on
expected future cash flows. Originating lenders, on the other hand, may conduct a more
subjective assessment, possibly due to the presence of "endowment biases", blending in
their current financial positions (i.e. the ability to absorb losses) or any past/future
commercial relationship with the borrower.
167
One respondent noted that there is a general negative public conception of and campaigns against
servicers and debt collection agencies (the DCAs), especially in some central Eastern European
countries.
168
According to consultation responses, third-party servicers have to have specific licenses in Germany,
Greece, Slovakia, and supervised in Romania.
147
Losses form NPL sales were also seen as a key obstacle to the development of NPL
markets. Disposals can lead to losses due to several reasons. First, and foremost,
disposing assets that are not adequately provisioned leads to financial losses, especially
when market conditions are depressed. Apart from the subjective assessments mentioned
above, under-provisioning may also arise due to regulatory or fiscal disincentives (i.e.
non-deductibility of provisioning losses). Forbearance rules may also allow banks to
graduate NPLs to performing status, even on a temporary basis, circumventing the need
to provision more. As a second manner in which disposals may generate losses, banks
using advanced internal ratings-based (A-IRB) models may suffer from higher capital
requirements in the future as the losses appear in their historical data sheets.169
Lastly,
heightened preference for an accelerated NPL reduction may flood the market with
similar types of assets and lead to fire sales.
Appendix to Annex 6
6.A.1 IMF and ECB/SSM Surveys about the legal framework of NPL markets in the
EU
A.1 IMF survey of country authorities and banks 2015
In 2015, the IMF (2015a, b) conducted a survey among 19 country authorities as well as
10 banks operating in these countries about institutional obstacles related to (1) the
supervisory framework, (2) the legal system, (3) distressed debt markets, (4)
informational shortcomings, and (5) the tax regime. At the request of country authorities,
the individual country replies were not revealed, i.e. the table below does not display
which country gave which rating.170
While the responses reveal a considerable variation,
the concerns were on average somewhat more severe with respect to the legal framework
and distressed debt market than for other issues addressed by the NPL Action Plan.
While the questions on the legal framework were related to insolvency procedures and
enforcement of NPLs171
, the issues identified with market development related to:
(1) incomplete credit information on borrowers;
(2) lack of licensing and regulatory regimes to enable nonbanks to own and manage
NPLs;
(3) overvalued collateral and lack of liquid real estate markets;
169
These concerns were raised in particular in the context of Italian and Romanian banking systems.
170
The survey was completed by 10 banking groups (Alpha Bank, Intesa, NBG, Piraeus, Pro Credit,
Raiffeisen, Societe Generale, Unicredit, Eurobank, and Erste Group) and 19 countries, of which 9
euro-area Members States (Cyprus, Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovenia,
and Spain), 3 non-euro area Member States (Croatia, Hungary, Romania) and 7 non-EU countries
(Albania, Bosnia and Herzegovina (from two separate jurisdictions), Iceland Macedonia,
Montenegro, San Marino, and Serbia).
171
IMF (2015a), technical background paper reports a high correlation of the results of the survey
with respect to legal obstacles and the World Bank Doing Business indicators on the insolvency
frameworks and contract enforcement.
148
(4) low recovery values, partly related to lengthy court procedures; and
(5) inadequate provisioning of NPLs.
Overall, the IMF survey suggests that potential buyers of NPL face relatively few explicit
restrictions. Most countries allow that third-party (including foreign) banks, as well as
institutional investors buy NPLs from local banks. The survey responses also document
that obstacles to market entry existed in some Member States still in 2015 (see Figure 6),
though some conditions have changed in a few Member States since then, most
obviously with respect to the activity of loan servicing firms.
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Table A6.A1 IMF assessment of determinants of NPLs in EU Member States
Table A6.A2 IMF assessment of determinants of NPL markets in EU Member States
6.A.2 ECB/SSM Stocktake 2017
The ECB Banking supervision's (SSM) "Stocktake of national supervisory practices and legal
frameworks related to NPLs" collected data from national competent authorities of the 19 euro
150
area MS in December 2016. The survey indicates that the regulatory framework in all
participating countries allows banks to outsource NPL loan servicing activities, although this
practice remains uncommon in many Member States. The Stocktake also shows that legal and
regulatory frameworks present a favourable environment for NPL transfer and the entry of
specialised investors into the local market. The few countries that had legal impediments, such as
portfolio transfer restrictions on non-banking institutions or barriers to the entry of foreign
investors, have amended their regulatory frameworks.
Table A6.A3 SSM assessment of loan servicing rules in euro area Member States
Table A6.A4 SSM assessment of rules applying to the Sale of loan portfolios in euro
area Member States
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6.A.3. Authorisation rules for Loan servicers and NPL purchasers in the EU
Member States
Information provided by Member States in summer 2017 unless otherwise indicated
Loan servicers NPL purchasers
BE There is no direct supervision by the Belgian
prudential supervisor towards the servicer. The
necessity to comply with certain specific
requirements is however organized indirectly,
through the supervised institution, which remains
fully responsible for the outsourced services and
activities, and which will therefore itself take all
necessary measures to supervise the activities
provided by the external servicer (and, e.g. its ability
to meet operational requirements and specific
compliance and audit requirements, cf. article 66 of
the Banking Law).
The answer depends on the nature of the acquired
loans.
With respect to the transfer of consumer credits,
article VII.102 of the Code of Economic Law
confirms that « The agreement or the receivables
resulting from the credit agreement can only be
assigned to, or, after substitution, only be acquired
by a creditor licensed or registered in application of
this Book, or can be transferred to or acquired by
the National Bank of Belgium, the Protection Fund
for Deposits and Financial instruments, credit
insurers , institutions for investment in receivables
within the meaning of the Law of 3 August 2012 on
undertakings for collective investment which satisfy
the conditions laid down in Directive 2009/65/EC
and institutions for investments in receivables, or
other persons specifically designated to that
purpose by the King”.
The “creditors licensed or registered in application
of this Book” are creditors of consumer credits and
creditors of mortgage loans (both licenses to be
issued by the FSMA). No other institutions or
persons were specifically designated by Royal
decree so far.
With respect to the transfer of mortgage credits,
article VII.147/17 of the Code of Economic Law
confirms that: “Without prejudice to the application
of articles 1250 and 1251 of the Civil Code, a
mortgage credit with movable use (e.g. to acquire a
vehicule) or the receivable resulting from such
credit agreement can only be assigned to, or, after
substitution, only be acquired by a creditor licensed
or registered in application of this Book, or can be
transferred to or acquired by the National Bank of
Belgium, the Protection Fund for Deposits and
Financial instruments, credit insurers, institutions for
investment in receivables within the meaning of
article 2 of the Law of 3 August 2012 on various
measures to facilitate the mobilization of
receivables in the financial sector, or other persons
specifically designated to that purpose by the King”.
The “creditors licensed or registered in application
of this Book” are creditors of consumer credits and
creditors of mortgage loans (both licenses to be
issued by the FSMA). No other institutions or
persons were specifically designated by Royal
decree so far.
BG None If the activity of acquiring loans represents 30% and
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Loan servicers NPL purchasers
more of the activity of the buyer and it is by
occupation, a registration into a public register of
the BNB is required under art. 3a of Law on credit
institutions. The legislation determines requirements
about the qualification, experience and reputation of
the managers and qualifying shareholders.
The minimum threshold of the registered capital and
the equity of the financial institution shall be
maintained above BGN 1 000 000 (500 000 EUR)
on an ongoing basis. The origin of the capital funds
shall be legitimate and transparent
The BNB does not apply prudential supervision for
the financial institutions.
form of incorporation – Ltd, JSC, location of
headquarters or incorporation in BG, ability to meet
certain compliance
CZ none none
DK The servicer is not required to obtain a full or
restricted banking license. The servicer is
furthermore not required to meet any “fit and proper”
requirements.
A buyer of a loan or a portfolio of loans is not
required to obtain a full or restricted banking license
or required to meet any “fit and proper”
requirements. If the buyer is not already registered
according to the AML regulation in Denmark,
registration according to this is a requirement
DE Based on Art. 25a KWG and MaRisk (AT 9), the
service provider has to provide sufficient resources
and expertise to perform the outsourced activities
and processes in an appropriate manner.
The purchase of loan receivables in execution of a
sales contract does not constitute credit business in
the meaning of § 1 According to the constant
administrative practice of BaFin the contractual
transference of the loan relationship between
originator and borrower on the credit buyer and
borrower (only possible with the approval of the
borrower) in execution of the sale contract isn’t
looked as loan business.
Both activities are usually considered as "factoring",
thus, an activity requiring a license. However, the
license requirement is only triggered when there is
a framework agreement between the seller (bank)
and the purchaser (factoring company) - aside from
the concrete sale of claims. The framework
agreement does not have to exist in written form. In
the case of a transfer of individual NPL portfolios
(without a framework agreement) to investors or
servicers, the German Financial Supervisory
Authority (BaFin) decides on a case-by-case basis
whether it considers the activity in question to be
"factoring" requiring a banking license.
EE none commercial activity is the criterion for triggering the
possible licensing/permit requirement
IE the servicer is required to comply with specific
requirements to legally perform the activities.
Under the Consumer Protection (Regulation of
Credit Servicing Firms) Act 2015 which was enacted
on 8 July 2015 only entities that have an appropriate
licence can conduct credit servicing. This legislation
was brought in to ensure that borrowers whose
loans were sold by a regulated lender to an
unregulated entity maintained the same level of
protection as they had prior to the sale of the loan.
Under the legislation the unregulated loan owner is
required to appoint an authorised credit servicing
There are no licensing or regulatory requirements in
relation to the acquisition and holding of a loan
portfolio. However, depending on the nature of the
loans, the transferee may be required to:
loans itself; or
service the loans on its behalf.
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Loan servicers NPL purchasers
firm to service the loan portfolio. Entities that provide
credit servicing include:
1. An entity that holds a licence to grant credit, i.e. a
licensed bank, retail credit firm or moneylender; and
2. An authorised Credit Servicing Firm
Pre-Approval Control functions have to go through
the fitness and probity regime by submitting an
Individual Questionnaire.
The firm is to be incorporated in the State. The
legislation also allows them to set up a branch in the
State also, for example, if a firm is based in the UK,
the firm can then set up a branch in Ireland.
EL - ability to meet specific compliance and audit
requirements
- other
The servicing companies are required to comply with
the following requirements:
• They are Greek companies under the legal
form of Société Anonyme or companies established
in any other EEA (European Economic Area)
Member-state which operate in Greece through a
branch
• Their scope of activity must be limited
specifically and explicitly to servicing of loans
• They must be granted a special operating
license for the above purpose by the Bank of
Greece, which also remains the sole competent
authority exercising supervision throughout their
active operating status
• They are registered in the General
Commercial Registry (G.E.MH.)
• Their license is published in the
Governmental Gazette.
The Bank of Greece Executive Committee Act No
118/19.5.2016 specifies the criteria, conditions and
supporting documentation with respect to the
licensing procedure for the establishment and
operation of the servicing companies. According to
the above mentioned Act, the servicing companies
are distinguished into two different categories: the
“simple” servicing companies and the ones that are
authorized to provide refinancing.
For the refinancing servicing companies the
requirements are the same as other financial
institutions operating in Greece, i.e. leasing,
factoring and consumer credit companies. More
specifically, it is required that these companies need
to comply with the fit and proper requirements for
their management body members and for their
shareholders, with governance requirements
equivalent to banks and initial capital of four million
five hundred thousand euro (€4,500,000).
The “simple” servicing companies have less
requirements such as a lighter fit and proper
framework and a few governance requirements such
as a written policy to prevent conflicts of interest and
initial capital of one hundred thousand euro
(€100,000).
According to law 4354/2015 (article 1, par.1b), the
following requirements apply to the buyer (Loan
Transferring Companies) :
 They are Greek companies under the
legal form of Société Anonyme or
companies established in any other EEA
(European Economic Area) Member-state
or companies domiciled in third countries,
which may at their discretion operate in
Greece through a branch, provided that
they are not domiciled in countries with
“favourable” tax regimes or “non-
cooperating” according to Greek tax law
4172/2013.
 Their scope of activity must explicitly
include the acquisition of loans and credit.
They are capable of loan/credit acquisitions only
under the condition that they have signed a loan
management agreement with a servicing company
properly licensed and supervised by the Bank of
Greece. Loan Transferring Companies themselves
are not required to obtain any operating license.
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Loan servicers NPL purchasers
All companies should be AML compliant and have a
detailed report setting out the basic principles and
methods ensuring the success of
forbearance/restructuring solutions; such report shall
not be required where the firm carries out servicing
business on behalf of a credit or financial institution
supervised by the Bank of Greece that is primarily
obliged to meet this requirement.
ES The servicer is not legally required to comply with
specific requirements, as there are no specific
regulations on the servicing activity. Whether the
outsourcing is deemed to affect core functions or
services, credit institutions shall formally notify the
competent authority, at least one month in advance,
of their plans to delegate those functions or services.
This notification shall be accompanied by the related
analysis of risks and of the mitigating measures. The
competent authority, depending on the nature or
criticality of certain functions or activities, may
establish additional limitations on the delegation.
none
FR Les exigences dépendront du caractère échu ou non
de la créance et du caractère amiable ou
contentieux du recouvrement (étant entendu que le
recouvrement forcé ne peut porter que sur créance
liquide ou exigible et ne peut se faire que sur la base
d’un titre exécutoire dont la délivrance constitue le
préalable). Restricted baking license: pour les
sociétés de financement qui ont été agréées pour
réaliser des opérations d’affacturage (étant entendu
que les autres entités autorisées à réaliser des
opérations de crédit sont soumises aux règles qui
leurs sont propres).
Dans le cas de créances non échues, l’acquéreur
exerce une activité réglementée et doit donc avoir
été autorisé dans les conditions suivantes : -
banking licence, meet certain "fit and proper"
criteria, specific form of incorporation, location of
headquarters or incorporation, ability to
meet operational requirements, ability to meet
certain compliance and audit requirements,
accounting requirements (i.e. do buyers have to
comply with IFRS or national GAAP provisions?)
IT172 debt collection license held with police office Non-banks should fulfil simplified capital requirements. An
investor needs to partner with a local management
company in order to comply with national regulation, the
securitization law strictly requires the establishment of a
local SPV
HR there are no specific regulation that regulates loan
servicers.
there are no requirements for the buyer.
CY There is no specific requirement for the servicer.
For outsourcing applications (the bank will outsource
the servicing of loans to a third party) the following
are required:
- Description of the services
- Details of the provider (in this case the
servicer)
- A risk assessment by the bank that has to
carry out for the tasks will outsource
Specific conditions of the contract
According to the Law regulating the Sale of Credit
Facilities and Other Related Issues, only the
following legal persons are allowed to acquire credit
facilities that are less than 1 mln:
(A) A credit acquiring company, including an asset
management company, incorporated in the
Republic, which has obtained authorisation from the
Central Bank.
In order to obtain authorisation, the company must
submit information to the Central Bank
demonstrating amongst others, that it fulfils certain
172
Information from industry source in public consultation.
155
Loan servicers NPL purchasers
“fit and proper” criteria, operational and
organisational requirements and any other
information as deemed necessary by the Central
Bank which are reflected in the Law.
(B) An authorised credit institution
(C) A credit institution that is authorised and
supervised by the competent authority of another
member state, which has the right, by virtue of
section 10A of the Business of Credit Institutions
Law, to provide services or to establish a branch in
the Republic.
(D) A financial institution, which is a subsidiary of a
credit institution incorporated in a member state and
which provides its services in the Republic or
operates in the Republic through a branch, under
the provisions laid down in section 10Bbis of the
Business of Credit Institutions Law.
HU restricted banking licence, specific form of
incorporation, -ability to meet specific compliance
and audit requirements, trigger is commercial activity
restricted banking licence, specific form of
incorporation, -ability to meet specific compliance
and audit requirements
MT Third party service permits are not known to exist.
BR/14 requires that if the service being outsourced
is lending, a banking licence is required
a buyer of a loan is expected to be authorised by
the Authority to carry out the activity of lending
under the Financial Institution’s Act and/or the
Banking Act [banking rule BR/14 principle 4.1]
LU173 There is a licensing and regulatory regime in place
to enable non-banks to recover/manage debts
(including NPLs)
LT no special requirements. General contract law
provisions shall be applied
No specific requirements are needed for a buyer
acquiring a defaulted loan where the contract
agreement is terminated;
In case of performing household loans (either
unsecured or secured), the acquirer must have a
licence of a credit provider, i.e. a consumer credit
provider licence, a banking licence or a restricted
banking licence. In case of performing corporate
loans, no specific requirements are in place.
LV A provider of debt recovery services is entitled to
recover a debt in the name of or on behalf of a
creditor, if it has registered as a merchant or a
performer of professional activities and has
received a special permit (licence) for debt
recovery. The Consumer Rights Protection Centre
shall issue the special permit (licence).
The Civil Law does not regulate such matters. Only
general provisions for different kind of contracts are
included in the Civil Law which are applicable to any
contractual party.
NL In the Act on Financial Supervision (Wet op het
financieel toezicht (Wft)) there is a duty for
companies to have a licence from the Authority of
Financial Markets (AFM) or a waiver, if they act as
an agent in the establishment of (loan) agreements
There is a duty for companies to have a license if
they offer credit. In case of a transfer of a loan, the
new owner is the one who ‘offers’ the credit. In such
a case a license is needed. There are however
waivers, such as for Special Purpose Vehicles
(SPVs). In that case the new owner has outsourced
173
ECB/SSM (2017)
156
Loan servicers NPL purchasers
between lenders and consumers In some cases
debt collectors need a license (to renegotiate
terms of an agreement on behalf of the lender), but
this is not always the case since waivers also
apply (for example if the agent purely collects
payments).
the management to a party that has a license as a
credit intermediary or a waiver, for example for
credit institutions
AT It depends on the activities performed; in case of
pure outsourcing, no specific requirements
necessary. Otherwise i.e. in the case of factoring, a
banking license would be required. If a banking
transaction is performed as listed in Art. 1 BWG, a
banking license is required
Specific requirements need to be fulfilled, for
instance in the case of purchase of receivables
(factoring) but also other set ups might be possible
(SPV) and depending on the funding and
construction/transactions performed, a full banking
license might be necessary
PL174 Authorisation required an Alternative Investment Fund Management structure is
required in order to invest in portfolios from the
supervised industry
PT According to article 5(2) of the Portuguese
Securitisation Law, the Portuguese Securities
Market Commission (Comissão do Mercado de
Valores Mobiliários or CMVM) can authorise a loan
servicer other than the Seller. The Law does not
establish specific requirements, but the servicer is
required to meet certain ‘fit and proper’ criteria, and
adequate human and operational resources. For the
servicer to grant new credit (fresh money), it must be
a credit institution, since only credit institutions may
grant credit professionally.
Under Portuguese banking law there is no specific
legal framework regulating the transfer of bank
loans. However, since lending is legally qualified as
a restricted activity, only credit institutions or
financial companies may acquire such loans on a
professional basis without it being considered
indirect lending.
Nevertheless, the transfer of bank loans is not
considered indirect lending if those are already non-
performing loans. Therefore, the answers below rely
on the assumption that the transferred loans in
question are not non-performing loans, since none
of these restrictions would otherwise be applicable.
RO The entities performing debt recovery activity need
to be registered with the National Authority for
Consumer Protection. In case of refinancing full
banking licence is required, according to the
banking legal framework, when the loan servicer is
not allowed to carry out lending activities in
accordance with the relevant applicable legal
framework.
Neither the loan servicers nor the loan servicing
activities are regulated by Romanian legislation
related to non-bank professional creditors.
In order to legally acquire a performing loan, the
buyer is required to be a creditor (is required a full
banking licence in case of a credit institution or the
registration as a non-bank professional creditor in
the NBR registers). fit and proper criteria for non-
bank professional creditors are regulated. entities
need to be incorporated as joint-stock commercial
companies. Regarding the NPLs for individuals, the
transferee (which can be only an entity performing
debt recovery activity) is required to have its head
office, a branch or a representative in Romania for
solving potentials disputes and for being held liable
in front of public authorities. The persons
responsible for managing the activity shall be of
good repute, knowledge and competence
requirements for staff should be required, the
remuneration structure of the staff should not be
solely contingent on the achievement of recovery
targets, nor should it be correlated solely with the
amounts recovered.
SI There are no special requirements for providers of
loan services per se.
There are no specific requirements for buyers to
legally acquire a loan except in case of consumer
credit – the buyer has to be authorised to provide
consumer credit. A bank may also transfer a
174
Information from industry source in public consultation
157
Loan servicers NPL purchasers
consumer credit to a buyer established as:
- the insurance company (in order to repay the
creditor for overdue credit obligations of the
collateral),
- the special purpose vehicle for securitisation,
- the special purpose vehicle for the management
non-performing loans
SK The servicing of loans is not recognised as a
separate activity and it falls under the definition of
providing credit and loans. The servicing of a loan
is considered as a banking activity requiring a
banking license
In case of transfer in the virtue of Art. 92(8) of Act
No 483/2001 Coll. there are no requirements as it
does not have to be a bank. For the transfer via
refinancing of the loan the same requirements as
for the loan originator apply.
According to Art. 17 of Act 129/2010 Coll. the
consumer credits can be transferred on a creditor
with a full authorisation to provide consumer credits,
bank, foreign bank or a branch of a foreign bank or
on a third party in case of a claim of a past due
consumer credit or a claim which became due
before the consumer credit due date is transferred
or assigned.
SE A person who collects debts on behalf of another
person, or collects debts which have been taken
over for collection, normally requires a permit from
the Data Inspection Board. Before permission is
granted, the company must have in its employment
a person with professional legal experience of debt
collection.
The Data Protection Authority determines whether
the conditions are met. Debt collecting must be
conducted in a professional and judicious manner.
The Data Protection Authority ensures that these
rules are adhered to. This is achieved by
inspections.
A person who collects debts on behalf of another
person, or collects debts which have been taken
over for collection, normally requires a permit from
the Data Inspection Board.
SF No [specific] requirements. The Act on collection of
the payments gives some guidelines how to collect
the payment with ordinary way
No special requirements
UK Mortgages: Permission to be a mortgage
administrator will require a firm to meet “fit and
proper” criteria, specific form of incorporation,
location of headquarters or incorporation, ability to
meet operational, specific compliance and audit
requirements as well as additional conduct
requirements.
Consumer credit: a firm wishing to be authorised
will need to meet the threshold conditions,
including suitability, business model and effective
supervision. There are also specific conduct of
business rules in the Consumer Credit (CONC)
module of our Handbook.
If a firm purchases a debt, and so becomes the
creditor, it needs permission for exercising, or
having the right to exercise, the lender’s rights and
duties under a regulated credit agreement (Article
60B(2)).
Regulated mortgages: If the buyer does not expect
to enter into new regulated mortgage contracts they
do not need any regulatory permissions – providing
they appoint a regulated firm to administer the
contracts purchased.
.


EN EN
EUROPEAN
COMMISSION
Brussels, 14.3.2018
SWD(2018) 75 final
PART 2/2
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT
The development of secondary markets for non-performing loans by removing undue
impediments to loan servicing by third parties and the transfer of loans (Part 1/2)
And
Accelerated Extrajudicial Collateral Enforcement (Part 2/2)
Accompanying the document
Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL
on credit servicers, credit purchasers and the recovery of collateral
{COM(2018) 135 final} - {SWD(2018) 76 final}
Europaudvalget 2018
KOM (2018) 0135
Offentligt
1
Table of Contents
1 The need to address Non-Performing Loans in the EU................................................................................... 6
2 Recent evolution of NPLs ............................................................................................................................... 7
3 Towards a comprehensive package of measures to address NPLs.................................................................. 8
4 Commonalities and interdependencies of the various measures ..................................................................... 9
5 The scope of the impact assessment.............................................................................................................. 12
6 Problem definition......................................................................................................................................... 15
6.1 What is the problem?........................................................................................................................... 15
6.2 What are the problem drivers?............................................................................................................. 17
6.2.1 Absence, inefficiency and fragmentation of out-of-court collateral enforcement mechanisms in the
EU (Problem Driver 1).................................................................................................................................. 17
6.2.2 Inefficiencies of the judicial system in some Member States (Problem Driver 2; out of scope)..... 20
6.3 Consequences ...................................................................................................................................... 21
6.3.1 Accumulation of high level of NPLs (Consequence 1)................................................................... 22
6.3.2 Lending to corporates is impeded and more expensive including cross-border spill-over effects
(Consequence 2)............................................................................................................................................ 24
6.4 How will the problem evolve?............................................................................................................. 27
7 Why should the EU act?................................................................................................................................ 28
7.1 Legal basis........................................................................................................................................... 28
7.2 Subsidiarity - Necessity of EU action.................................................................................................. 28
7.3 Subsidiarity - Added value of EU action............................................................................................. 29
8 Objectives: What is to be achieved? ............................................................................................................. 30
9 What are the available policy options?.......................................................................................................... 31
9.1 What is the baseline from which options are assessed?....................................................................... 31
9.2 Description of the policy options......................................................................................................... 32
9.2.1 Scoping the policy options .............................................................................................................. 32
9.2.2 Option 1 - Non-regulatory action based on existing international harmonisation initiatives of
extrajudicial collateral enforcement procedures............................................................................................ 33
9.2.3 Option 2 - Minimum harmonisation of extrajudicial collateral enforcement procedures................ 36
9.2.4 Option 3 - Creation of a new EU security right together with a fully harmonised extrajudicial
enforcement procedure.................................................................................................................................. 39
9.3 Options discarded at an early stage...................................................................................................... 41
9.3.1 Option 4 - EU out-of-court enforcement mechanisms through an alternative regime..................... 41
9.3.2 Option 5 - Harmonisation of judicial collateral enforcement procedures ....................................... 42
10 What are the impacts of the policy options? ............................................................................................ 42
2
10.1 Option 1 - Non-regulatory action based on existing international harmonisation initiatives of
extrajudicial collateral enforcement procedures................................................................................................ 42
10.1.1 Pros and cons .............................................................................................................................. 42
10.1.2 Impact on key stakeholders......................................................................................................... 43
10.1.3 Stakeholders' views..................................................................................................................... 44
10.2 Option 2 - Minimum harmonisation of extrajudicial collateral enforcement procedures.................... 44
10.2.1 Pros and cons .............................................................................................................................. 44
10.2.2 Impact on key stakeholders......................................................................................................... 45
10.2.3 Stakeholders' views..................................................................................................................... 46
10.3 Option 3 - Creation of a new security right together with a fully harmonised extrajudicial enforcement
procedure........................................................................................................................................................... 48
10.3.1 Pros and cons .............................................................................................................................. 48
10.3.2 Impact on key stakeholders......................................................................................................... 48
10.3.3 Stakeholders' views..................................................................................................................... 49
11 How do the options compare?.................................................................................................................. 52
12 The preferred option and its overall impacts............................................................................................ 56
12.1 Economic impacts................................................................................................................................ 56
12.2 Social impacts...................................................................................................................................... 61
12.3 Impacts on fundamental rights............................................................................................................. 63
12.4 Environmental and other impacts ........................................................................................................ 64
12.5 REFIT (simplification and improved efficiency) ................................................................................ 64
13 How will actual impacts be monitored and evaluated?............................................................................ 67
Annex 1 – Procedural information........................................................................................................................ 69
I. Lead DG, DeCIDE planning /CWP references.............................................................................................. 69
II. Organisation and timing ............................................................................................................................... 69
III. Exceptions to the better regulation guidelines............................................................................................. 70
IV. Consultation of the Regulatory Scrutiny Board (RSB)............................................................................... 70
V. Evidence, sources and quality ...................................................................................................................... 70
Annex 2 – Stakeholder consultation...................................................................................................................... 71
Meetings with member states............................................................................................................................ 81
Expert group meetings ...................................................................................................................................... 83
Bilateral meetings with stakeholders................................................................................................................. 86
Annex 3 – Who is affected by this initiative and how?......................................................................................... 88
1. Practical implications of the initiative........................................................................................................... 88
2. Summary of costs and benefits...................................................................................................................... 88
Annex 4 – Analytical methods used in preparing the impact assessment ............................................................. 91
Annex 5 – Main features of national out-of-court collateral enforcement mechanisms in the EU ....................... 97
3
Annex 6 – Impacts of the policy options – detailed description ......................................................................... 128
Annex 7 – Background information.................................................................................................................... 146
I. Role of security interests and secured lending............................................................................................. 146
II. Recovery procedures (judicial and non-judicial) in case of debtor's default .............................................. 147
III. Related EU actions.................................................................................................................................... 148
III.A Financial Collateral Directive ............................................................................................................ 148
III.B Commission proposal on preventive restructuring and second chance .............................................. 149
IV. The size of the NPL problem in the EU.................................................................................................... 150
V. (First-order) comparison of the efficiency of the judicial system .............................................................. 155
References........................................................................................................................................................... 158
List of figures
Figure 1 EU Non-Performing Loans ratio............................................................................................................... 7
Figure 2: NPL ratio in EU Member States.............................................................................................................. 7
Figure 3 Commission's policy initiatives within the NPL Action Plan................................................................... 9
Figure 6 - The reinforcement effects between the initiatives of the NPL package................................................ 10
Figure 1 – Legal protection and financial development/volatility........................................................................ 16
Figure 2 – IRR on Investment in Distressed Assets Time to Foreclosure & Average Time to Foreclosure and
NPLs...................................................................................................................................................................... 17
Figure 3 – Recovery rate, Time and Outcome based on the availability of out-of-court enforcement (for
immovable and movable assets) in EU Member States......................................................................................... 20
Figure 4 – MFI lending to non-financial corporations, EU (2010Q1-2016Q1)................................................... 25
Figure 5 – Cost of borrowing for NFCs, EA (Jan 2007-Oct 2016, in %) ............................................................. 26
Figure 6 - The reinforcement effects between the initiatives of the NPL package................................................ 58
Figure 7 – Type of funding according to firm size................................................................................................ 60
Figure 8 – Share of loans with collateral and guarantees in total loans and advances, by loan size................... 61
Figure 9 – Illustrative estimates of the impact of the options on modelled recovery rates (pp.) .......................... 93
Figure 10 - Non-performing loan ratio for MS with out-of-court collateral enforcement and for those with
incomplete or absent OOC mechanisms (%) ........................................................................................................ 94
Figure 11 – Share of secured loans in total loans and advances to non-financial corporations, 2016.............. 147
Figure 12 – Timeline from default to insolvency proceedings............................................................................ 148
Figure 13 – Non-performing loan ratios by borrower category......................................................................... 153
Figure 14 – Non-performing loans to non-financial corporations and coverage (% of total gross loans to non-
financial corporations) ....................................................................................................................................... 153
Figure 15 – Non-domestic affiliates in euro area countries ............................................................................... 154
Figure 16 – Share of cross-border loans in the euro area by sector .................................................................. 154
Figure 17 – Number of days needed to enforce a contract trough the courts..................................................... 157
4
List of tables
Table 1 – Intervention logic diagram.................................................................................................................... 31
Table 2 – Pros and cons – Option 1...................................................................................................................... 42
Table 3 – Positive and negative impacts, stakeholder type – Option 1................................................................. 43
Table 4 – Pros and cons – Option 2...................................................................................................................... 44
Table 5 – Positive and negative impacts, stakeholder type – Option 2................................................................. 45
Table 6 – Shareholders' views – Option 2............................................................................................................. 46
Table 7 – Pros and cons – Option 3...................................................................................................................... 48
Table 8 – Positive and negative impacts, stakeholder type – Option 3................................................................. 49
Table 9 – Stakeholders' views - Option 3.............................................................................................................. 49
Table 10 – Key characteristics of the policy options ............................................................................................ 52
Table 11 – Benchmarking policy options.............................................................................................................. 54
Table 12 – Effectiveness/efficiency/coherence and stakeholder support of the policy options ............................. 55
Table 13 - Illustrative quantification of economic benefits................................................................................... 58
Table 14 – Overview of benefits............................................................................................................................ 88
Table 15 – overview of costs................................................................................................................................. 89
Table 16 – AFME estimates of impact of recovery rates on corporate yield spreads (selected parts presented). 95
Table 17 - Estimates of impact of recovery rates on corporate borrowing costs.................................................. 96
Table 18 – Cost of carrying out publicity formalities ......................................................................................... 143
Table 19 – NPL ratios in Member States as of December 2016 ......................................................................... 152
5
Glossary
AECE Accelerated Extrajudicial Collateral Enforcement
ALS Accelerated Loan Security
AMC Asset Management Companies
CMU Capital Markets Union
DCFR Draft Common Frame of Reference
EA Euro Area
EBA European Banking Authority
EBRD European Bank for Reconstruction and Development
EFSIR European Financial Stability and Integration Review
EP European Parliament
ESRB European Systemic Risk Board
FCD Financial Collateral Directive
FSC Financial Services Committee
GDP Gross Domestic Product
IMF International Monetary Fund
MFI Monetary Financial Institutions
MLTS Model Law on Secured Transactions
MS Member States
NCA National Competent Authority
NFC Non-Financial Company
NPE Non-Performing Exposure
NPL Non-Performing Loan
OECD Organisation for Economic Co-operation and
Development
RAQ Risk Assessment Questionnaire
SME Small and medium-sized enterprise
SSM Single Supervisory Mechanism
TFEU Treaty on the Functioning of the European Union
UNCITRAL United Nations Commission on International Trade
Law
6
1 The need to address Non-Performing Loans in the EU
Following the financial crisis, the regulatory framework for banks has changed substantially. The European
Union has taken the lead in implementing reforms agreed globally at the level of the G20 and in the Basel
Committee with the objective of reducing risk in the banking sector, reinforcing financial stability and avoiding
that taxpayers have to contribute financially to the costs of failing banks. In addition to these measures, the
institutional arrangements for the supervision and resolution of banks in the EU have been strengthened
fundamentally with the establishment of the first two pillars of the Banking Union (BU): the Single Supervisory
Mechanism (SSM) and the Single Resolution Mechanism (SRM).1
As a result of these measures, the EU banking
sector is in a much better shape today than in previous years.
Nevertheless, several challenges remain to be addressed, including how to decisively address the high stocks of
non-performing loans (NPLs) and other non-performing exposures (NPEs)2
. NPLs have piled up in parts of the
EU banking sector in the aftermath of the financial and sovereign crises and ensuing recessions. High levels of
NPLs in parts of the banking sector have posed significant risks to financial stability and the overall economy in
the EU, unlike in other major economies such as the United States or Japan which have previously taken a
number of actions to reduce the level of NPLs and repair banks’ balance sheets.3
High NPL ratios4
can weigh on a bank's short- and longer-term performance through two main channels. First,
NPLs generate less income than performing loans – thus reducing bank profitability – and may cause losses that
diminish the bank's capital. In the most severe cases, these effects can put in question the viability of a bank with
potential implications for financial stability. Second, NPLs tie up significant amounts of a bank's resources, both
human and financial.5
Banks saddled with high levels of NPEs have therefore only a limited capacity to provide
new credit to viable businesses. Small and medium-sized enterprises (SMEs) are particularly affected by the
reduced credit supply, as they rely on bank lending to a much greater extent than larger companies, thereby
affecting economic growth and job creation.6
For all these reasons, the Commission has for a long time
highlighted the urgency of taking the necessary measures to address the risks related to NPLs.
While tackling NPLs is primarily the responsibility of national authorities7
, there is also a clear EU dimension of
the NPLs issue. Given the high level of economic and financial integration in the EU, and especially within the
euro area (EA), there are important potential spill-over effects from Member States with high levels of NPLs to
the economies of other Member States and the EU at large, both in terms of economic growth and financial
stability.8
Weak growth in some Member States due to elevated NPL levels might affect economic growth
elsewhere. Also, weak balance sheets of just a few banks can negatively affect investors' general perception of
the value and soundness of other EU banks. This can unnecessarily raise the funding costs for the sector as a
whole, which may adversely affect the cost of credit to borrowers.
Addressing high stocks of NPLs and their possible future accumulation is therefore essential for restoring the
competitiveness of the banking sector, preserving financial stability and supporting lending to create jobs and
1
The third pillar of the Banking Union, the European Deposit Insurance Scheme (EDIS), was proposed by the Commission in November
2015.
2
NPEs include non-performing loans (NPLs), non-performing debt securities and nonperforming off-balance-sheet items. NPLs,
which term is well established and commonly used in the policy discussion, represent the largest share of NPEs. Throughout this document
the term NPL is meant in a broad sense equivalent to NPE, and hence the two terms are used interchangeably.
3
See, for example, FSC (2017) "Report of the FSC Subgroup on Non-Performing Loans"; FSI (2017) "Resolution of non-performing loans –
policy options"; and IMF (2015) "Global Financial Stability Report, Chapter 1: Enhancing policy traction and reducing risks".
4
The term NPL ratio refers to the ratio of non-performing loans to total outstanding loans.
5
A large portion of the employees' time is spent dealing with lengthy procedures required to manage NPLs. As NPLs are considered riskier
than performing loans, they may require higher amounts of regulatory capital if left un-provisioned.
6 Simulations by the IMF (2015b) suggest that a reduction of European Non Performing Loans to the historical average ratio (by
selling them at net book value i.e. after provisioning) could increase bank capital by EUR 54 billion. This would under some assumptions
enable EUR 553 billion in new lending.
7
As also underlined in the European Semester recommendations to relevant Member States.
8
See ESRB (2017) and IMF (2015).
7
growth. This analysis is shared by a number of reports from European institutions, international organisations,
and think tanks.9
2 Recent evolution of NPLs
The general improvement in NPL ratios over recent years continued in 2017, as did the quality of banks’ loans
portfolios. The latest figures confirm the downward trend of the NPL ratio, which declined to 4.6% (Q2 2017),
down by roughly 1 percentage point (pp) year-on-year (see Figure 1). This reduction was mainly the result of
one‐off events that impacted all bank‐size classes, in particular smaller banks. However, the ratio remains
elevated when compared to historical norms and to other regions10
and the total volume of NPLs across the EU is
still at the level of EUR 950 billion.11
Figure 1 EU Non-Performing Loans ratio Figure 2: NPL ratio in EU Member States
3.5
4.5
5.5
6.5
2014-Q4 2015-Q2 2015-Q4 2016-Q2 2016-Q4 2017-Q2
European Union
Source: European Central Bank
Gross non-performing loans and advances
(in % of total gross loans and advances, end-of-period values)
Source: ECB. Note: Dec-2014 not available for CZ.
The situation differs significantly across Member States (see Figure 2). Several countries still have high NPL
ratios (9 had ratios above 10% in the second quarter of 2017), while others have rather low ratios (10 Member
States were below 3%).
There is evidence of some progress in reducing NPL ratios in the most affected countries, owing to a
combination of policy actions and a stronger macroeconomic environment. However, significant risks to
economic growth and financial stability remain and progress is still slow, especially where it is needed the most.
Structural impediments continue to hamper a faster fall in NPL stocks. Provisioning is often still too slow and
insufficient to allow for effectively resolving and preventing any critical accumulation of NPLs in the future.
Among other elements, activity on secondary markets for NPLs is also not yet sufficient to substantially
contribute to NPL reduction efforts, notwithstanding the increased interest from certain investor groups and the
increasing volume of NPL-related transactions.
9
See ECB (2016, 2017), EBA (2017), FSC (2017), ESRB (2017),.IMF (2015a, b), Vienna Initiative (2012), Baudino and Yun (2017),
Bruegel (2017), Barba Navaretti et al. (2017).
10
The NPL ratio for both the United States and Japan was around 1.5 % in December 2016.
11
Source: ECB.
0
10
20
30
40
50
AT
BE
BG
CY
CZ
DE
DK
EE
ES
FI
FR
UK
EL
HR
HU
IE
IT
LT
LU
LV
MT
NL
PL
PT
RO
SE
SI
SK
%
Dec-14
Jun-17
8
3 Towards a comprehensive package of measures to address NPLs
A comprehensive and credible strategy to address NPLs is an essential and urgent step towards restoring the
viability of – and hence investor confidence in – the EU banking sector. Pursuing a comprehensive strategy and
taking determined action to address NPLs is also essential for the smooth functioning of the Banking Union and
the Capital Markets Union (CMU) and for a stable and integrated financial system. In this way, the resilience of
the Economic and Monetary Union to adverse shocks will be enhanced by facilitating private risk-sharing across
borders, while at the same time reducing the need for public risk-sharing.
Integrating national and EU-level efforts is needed to address the NPL problem, both on the existing NPL stocks
and on future NPL flows. Reflecting the EU dimension and building on previous work by the Commission and
other competent EU authorities, the Council adopted in July 2017 an Action Plan To Tackle Non-Performing
Loans in Europe.12
It recognises that work in this area must be based on a comprehensive approach combining a
mix of complementary policy actions, since the complexity of the problem simply does not lend itself to a single
‘silver bullet’ solution.
The Council Action Plan combines various measures by national governments, bank supervisors and EU
institutions that improve the tools and incentives for banks to pro-actively address NPLs either by internal work-
out or through disposal. In practice, this means enhancing legal frameworks relevant for both the prevention and
resolution of NPLs, including the functioning of secondary markets. However, other measures such as improving
the availability and quality of data on NPLs or improving the market infrastructure (eg. set-up of trading or
information platforms) are equally important. If the right pre-conditions are present, tools such as Asset
Management Companies are also an efficient way to allow resolution of NPLs while removing NPLs from the
banking system in the short term.
The Commission has committed to delivering on the parts of the NPL Action Plan within its remit. Accordingly,
the Commission announced in its October 2017 Communication on completing Banking Union a comprehensive
package for tackling high NPL ratios, to be put forward by Spring 2018.13
This "Spring package" consists of the following measures:
 A Blueprint for how national Asset Management Companies (AMCs) can be set up in compliance with
existing EU banking and State aid rules by building on best practices learned from past experiences in
Member States.
 A legislative initiative to further develop secondary markets for NPLs, especially with
the aim of removing undue impediments to loan servicing by third parties and to the
transfer of loans to third parties.
 A legislative initiative to enhance the protection of secured creditors by allowing them
more efficient methods of value recovery from secured loans through Accelerated
Extrajudicial Collateral Enforcement (AECE). This refers to an expedited and efficient
out-of-court enforcement mechanism which enables secured creditors (banks) in all
Member States to recover value from collateral granted by companies and
entrepreneurs to secure loans.14
 A legislative initiative amending the Capital Requirement Regulation (CRR), with
regard to the introduction of minimum coverage requirements for incurred and
expected losses on future NPLs arising from newly originated loans, in order to
12
See http://www.consilium.europa.eu/en/press/press-releases/2017/07/11/conclusions-non-performing-loans/
13
COM(2017) 592 final, 11.10.2017, available at: http://ec.europa.eu/finance/docs/law/171011-communication-banking-
union_en.pdf.
14
This initiative will remain consistent with and complementary to the Commission proposal of November 2016 for a Directive on, inter alia,
preventive restructuring frameworks and would not require harmonisation of actual insolvency provisions.
9
backstop potential under-provisioning of future NPLs and prevent their build-up on
banks’ balance sheets.
 A way forward to foster the transparency on NPLs in Europe by improving the data
availability and comparability as regards NPLs, and potentially supporting the
development by market participants of NPL information platforms or credit registers.
15
The Council Action plan initiatives under the responsibility of other EU institutions and competent authorities
include, among others:
 General guidelines on NPL management applicable to all EU banks;
 Detailed guidelines on banks' loan origination, monitoring and internal governance, addressing in
particular transparency and borrower affordability assessment;
 Macro-prudential approaches to prevent the emergence of system-wide NPL problems, taking into
account potential pro-cyclicality and financial stability implications of NPL policy measures;
 Enhanced disclosure requirements on banks' asset quality and non-performing loans.
4 Commonalities and interdependencies of the various measures
The legislative and non-legislative initiatives of the Council Action plan are interlinked and mutually
reinforcing. They should create the appropriate environment for dealing with NPLs on banks' balance sheets.
Some of them have an impact on the reduction of the current stock of NPLs, and all are relevant for reducing
risks of future NPL accumulation. Their impact is expected to be different across Member States and affected
institutions. Some will have a stronger impact on banks' ex ante risk assessment at loan origination, some will
foster swift recognition and better management of NPLs, and others will enhance the market value of such NPLs.
Figure 3 Commission's policy initiatives within the NPL Action Plan
15
In addition, the Commission is also undertaking a benchmarking exercise of loan enforcement regimes to establish a reliable picture of the
delays and value-recovery banks experience when faced with borrowers' defaults, and invites close cooperation from Member States and
supervisors to develop a sound and significant benchmarking methodology. In this context, the 2016 Commission proposal for a Directive on
business insolvency, restructuring and second chance lays down obligations on Member States to collect comparable data on insolvency and
restructuring proceedings.
10
The Commission's three legislative initiatives, namely i) statutory prudential backstops for loan loss coverage; ii)
the development of secondary markets for NPLs, and iii) accelerated extrajudicial collateral enforcement
mechanisms, mutually reinforce each other and also interact with the other measures of the Council Action Plan.
For example, the prudential backstops initiative ensures that credit losses on future NPLs are sufficiently
covered, making their resolution and/or disposal easier. These effects would be complemented by better
developed secondary markets for NPLs as these would make demand for NPLs more competitive and raise their
market value. Furthermore, accelerated collateral enforcement as a swift mechanism for recovery of collateral
value would reduce the costs for resolving NPLs. These interactions are described in greater detail in the below
box.
Box on the reinforcement effects between the Commission's legislative initiatives
This box assesses the possible reinforcement effects between the three initiatives of the Spring package, namely
i) statutory prudential backstops for loan loss coverage; ii) development of secondary markets for NPLs, and iii)
accelerated extrajudicial collateral enforcement mechanisms. As is the usual practice, each individual impact
assessment gauges the incremental effects of the proposed measure against a no policy change baseline. The
underlying idea of the NPL package is, however, that the effects of each initiative will be mutually enhancing.
The exact quantification of these feedback effects is a quite complex exercise as it is subject to strong modelling
uncertainty. This box hence provides a qualitative description of the feedback channels and their relative
strength.
Figure 4 - The reinforcement effects between the initiatives of the NPL package
Statutory prudential
backstops
Banks' immediate
recognition of NPLs
Market access to NPL
investors and loan servicers
Higher recovery value of
NPLs
Bank supervision
Better risk assessment in
lending decisions Reform of debt
restructuring and recovery,
insolvency frameworks
Enabling secondary
markets for NPLs
Data standardization and
transaction platforms
Asset management
companies
Powers of bank supervisors
Collateral enforcement
Insolvency reform and loan
enforcement
11
Effects of Accelerated extrajudicial collateral enforcement (AECE) on other initiatives
As AECE becomes more popular and used by credit institutions, the statutory prudential backstop measures
would be less binding. Indeed, banks would tend to restructure, recover or dispose of their NPLs earlier and at a
higher rate. They would be less affected by the need to increase provisioning as time goes by, as required by the
prudential backstops measures.
Given that the AECE feature would follow the NPLs following their disposal to a third party, this would help the
development of the secondary market by increasing investor participation and thereby its liquidity (NPL demand-
side effects). In particular, shorter time of resolution and increased recovery, as expected with AECE, would
increase the bid prices. Moreover, the harmonization achieved by AECE would foster development of pan-
European NPL investors, further improving market liquidity.
Effects of Statutory prudential backstops on other initiatives
The more costly in terms of higher provisioning it becomes for banks to keep secured corporate NPLs on their
balance sheets due to the new prudential backstop rules, the higher the incentives for banks to restructure,
recover or dispose of NPLs quicker and earlier, and hence the higher the use of AECE directly (by triggering it)
or indirectly (by disposing of the NPL to a third party).
Holding NPLs on the balance sheet will become costly over time, providing an incentive for banks to dispose of
NPLs on the secondary markets at an early stage, when the backstops require less minimum coverage. Once the
minimum coverage level required by the backstops becomes more binding, the carrying book value of NPLs will
be reduced. Both of these mechanisms would ensure more sellers participation on the secondary market (NPL
supply-side effect), thereby reducing the ask price of NPLs.
Effects of the development of secondary markets for NPLs on other initiatives
Improved investor participation and better functioning of secondary markets would reduce the bid-ask spread
and increase the volume of NPLs that are transferred to third parties. Banks would dispose of NPLs more eagerly
and at an earlier stage, therefore the provisioning backstop would be less often binding.
12
With a more liquid and better functioning secondary market for NPLs where investors show appetite for NPLs
with the AECE feature, there would be additional incentives for credit institutions to use AECE at origination of
new loans. This indirect feedback effect would become active once sellers realise that it is easier to dispose of
NPLs having the AECE feature to third party investors.
The effectiveness of the three aforementioned legislative measures would increase if banks are adequately
capitalised in the future. Better capitalised banks will be more eager to sell NPLs in the secondary market or to
realise the collateral of a non-performing loan in a timely fashion. Furthermore, statutory minimum coverage
requirements would provide strong incentives for banks' management to prevent the accumulation of future
NPLs through better NPL management and stronger loan origination practices. This will reinforce the expected
effects of the EBA’s and ECB’s work on banks' loan origination, NPL management, monitoring and internal
governance practices. Work on NPL information and market infrastructure would further enhance the
functioning of NPLs secondary markets. Lastly, measures related to loan enforcement would complement the
Commission's November 2016 proposal for a Directive on business insolvency, preventive restructuring and
second chance, by increasing the chances that viable businesses survive while non-viable activities are swiftly
resolved.16
5 The scope of the impact assessment
The measures discussed above will effectively deal with current excessive levels of NPLs and
will also be effective in dealing with NPLs in the future. However, in order to reduce the risk
of a future re-emergence of NPL problems, further measures need to be considered.
In order to put EU-wide brakes on the build-up of future NPLs stocks on banks' balance
sheets focuses on the enforcement of secured loans the Commission is considering measures
to improve the effectiveness of out-of-court enforcement of secured loans in case of
borrower's default. This which could also contribute to easing the burden on courts by
reducing the number of secured loans which are judicially enforced, while at the same time
recognising the role of courts in safeguarding the rights of debtors. A key consideration in
developing this initiative is to ensure that it shall be consistent with and complementary to the
2016 Commission proposal for a Directive on preventive restructuring frameworks, second
chance and measures to increase the efficiency of restructuring, insolvency and discharge
procedures17
.
The current high reliance on judicial enforcement of collateral can be costly and slow.
Protection of secured creditors from borrowers’ default, including through timely and clear
extrajudicial collateral enforcement mechanisms, is heterogeneous across Member States. The
Commission therefore explores the merits and feasibility of an Accelerated Extrajudicial
Collateral Enforcement (AECE). The AECE refers to an expedited and efficient out-of-court
enforcement mechanism that enables secured creditors (banks) to recover value from
collateral granted by companies and entrepreneurs to secure loans. Secured creditors would
not be required to wait for the result of judicial enforcement proceedings that often take a
considerable amount of time and end up with low recovery rates. This is even more important
in cases of cross-border lending, as extrajudicial collateral enforcement mechanisms are very
16
COM(2016) 723 final.
17
COM(2016) 723 final, 22.11.2016.
13
heterogeneous across Member States, with a wide variety in terms of approaches and
efficiency. Given that these protections are currently not available to banks in all Member
States, and their introduction in the entire EU could help support secured lending to firms
both in terms of increasing volume and decreasing interest rates. The AECE would be a
mechanism which could be used upon voluntary agreement by the parties in relation to
Member States' existing security rights in order to enable banks to enforce collateral swiftly
and at lower cost.
This impact assessment explores ways to enhance the ability of banks as secured creditors to
enforce assets granted as collateral to secure loans by business borrowers (companies and
entrepreneurs) in case business borrowers fail on their obligations in paying back the loans.
Out-of-court enforcement mechanisms for collateral could usefully complement judicial
procedures for collateral enforcement by ensuring an expeditious value recovering from
unpaid loans in a timely and predictable manner. The current high reliance of Member States
on judiciary enforcement for collateral can be costly and slow. More effective out-of-court
enforcement mechanisms could incentivise banks to grant credit to companies more readily
by enhancing predictability in the execution of the loan contractual terms. For the purpose of
this impact assessment, the accelerated enforcement of collateral should be understood as a
possible mechanism which:
(i) is extrajudicial;
(i) is of contractual nature and is agreed between a bank in its capacity of secured
creditor, and a company or an entrepreneur (business loans, not consumer loans)18
;
(ii) can be used for the purpose of enforcing assets granted as collateral to secure a
loan, where a loan is granted by a bank (credit institution) to a company and/or
entrepreneur and the collateral is represented by movable and immovable assets;
(iii) grants the creditor the ability to enforce the collateral through this mechanism, but
its actual use is not mandatory;
(iv) the use of this mechanism is without prejudice to the right of the borrower, as well
as of the creditor, to have recourse to the judicial court in relation to the use of such
mechanism (i.e. to challenge the enforcement), and without prejudice to the right of
the borrower to initiate preventive restructuring or insolvency procedures at any time.
A more effective and swift out-of-court mechanism for recovery of collateral value in the EU
would:
a) reduce the costs and improve the recovery from the resolution of banks' NPLs,
while potentially increasing balance sheet space for future lending activities;
b) mitigate the accumulation of future stocks of NPLs (and possibly help to reduce the
stock of current ones19
) by increasing the recoverable value of collateral and
improving NPLs secondary market liquidity; and
18
At credit origination, the voluntary nature of the enforcement mechanism (agreed by the counterparts) would
leave the creditor discretion as to whether or not to trigger the mechanism.
14
c) reduce costs and increase the availability of secured lending especially in countries
where enforcement procedures are lengthy and expensive.
It would therefore contribute to ensuring the soundness of Member States' banking sectors,
which is a particularly important factor for the functioning of the Banking Union, with
relevance for the whole single market, given the interconecteness of the financial system. A
more effective and swift out-of-court mechanism for recovery of collateral value should also
contribute to achieving the CMU objectives of creating more investment, jobs and growth in
the EU through a better funding of companies and entrepreneurs.
19
The direct impact on current stocks of NPLs will depend on how much of them will be bilaterally renegotiated
to benefit from this new out-of-court procedure. In addition, the potential risk mitigation effects on future build-
up of NPLs can also have an indirect impact on the price of current stocks of NPLs
15
6 Problem definition
Background information complementing the information provided in the main body of the
document can be found in Annex 7 on:
 The role of security interests and secured lending
 The recovery procedures (judicial and non-judicial) in case of debtor's default
 Related EU actions (Financial Collateral Directive and Commission proposal on
preventive restructuring and second chance)
 The size of the NPL problem in the EU
 (First-order) comparison of the efficiency of the judicial system.
6.1 What is the problem?
When the debtor does not perform on its obligation to pay back the secured loan, the creditor
can recover value from the collateral through an enforcement procedure. At face value, the
value of the assets given as collateral is in general sufficient to cover the value of the
outstanding debt obligation. However in practice a security right has a reduced value to a
secured creditor if it cannot be enforced effectively and efficiently. High costs of
enforcement of the security rights may be one of the reasons behind banks' reluctance to
trigger a collateral enforcement procedure. In a high debt context, several coordination
problems may also arise and lead to banks' slow resolving of secured bad loans. Bricongne et
al. (2016) discuss three such problems: strategic delays (lenders wait with loss recognition
and hope for an improved macroeconomic context), collateral meltdown (simultaneous sale of
collateral by all lenders leads to a sharp fall in asset prices), and court congestion (judicial
resources available for resolving bad debts may be insufficient in times of bad debt stress).
When procedures for enforcing collateral are lengthy and costly, the microeconomic
benefits of the use of collateral, as reviewed in the annex 7 (section I) are impaired. Ex
ante, banks tend to lend less and/or at higher lending rates, because they take into account
their possible future difficulties to recover value from the encumbered asset in event of
borrower default. From a debtor’s perspective, the lengthy proceedings can also increase
moral hazard, as debtors might be well aware that the collateral will not be easily and quickly
enforced and that they may be less incentivised to pay their loans in a timely manner. Both of
these factors limit the overall funding available for business expansion and slow down trade,
investment, and economic development.20
Ex post, once banks accumulate on their books a
large stock of bad loans for which recovery of value from collateral is difficult; their ability to
extend credit to the rest of the economy is impaired. This may reduce the speed at which an
economy can recover from a downturn and may lead to protracted periods of sluggish growth.
Existing research confirms that weak creditor protection and weak enforcement not
only reduce the financial development and the provision of funding to the economy but
20
https://www.oecd.org/investment/toolkit/policyareas/investmentpolicy/contractenforcementanddisputeresolutio
n.htm
16
also make credit markets more volatile i.e. more responsive to external shocks (see
Figure 5 below).21
Moreover, Aiyar et al. (2015) show that weak debt enforcement raises the
legal cost of debt restructuring and hampers banks’ ability to seize loan collateral, reducing
the expected recovery rate on delinquent loans (left panel of Figure 6). NPLs tend to be lower
in countries where recovery periods are shorter (right panel of Figure 6).22
The ability to
enforce credit claims (in particular through collateral foreclosure) is essential to efficient debt
workouts as it enables creditors to enforce their claims as a going or gone concern in a
predictable, equitable, and transparent manner. Finally, empirical research shows that the
enforceability of collateral matters for the structure and pricing of loans, again showing a
direct impact on lending available to the economy. A comparison by Bae and Goyal (2009) of
the effect of differences in legal protection across countries affect the size, maturity, and
interest rate spread on loans to borrowers in 48 countries shows that banks respond to poor
enforceability of contracts by reducing loan amounts, shortening loan maturities, and
increasing loan spreads. 23
Figure 5 – Legal protection and financial development/volatility
Source: Creditor Protection and Credit Response to Shocks; Note: Panel (a) shows how the development of
credit markets (as measured by the ratio of credit to the private sector supplied by the financial sector to GDP) is
strongly related to a measure of legal protection to creditors. Panel (b) shows that the volatility of credit—
measured as the standard deviation of the annual real growth rate of the ratio of credit to GDP—is significantly
smaller in countries with stronger creditor protection.
21
Galindo, Arturo José, and Alejandro Micco. 2007. “Creditor Protection and Credit Response to Shocks.”
World Bank Economic Review 21 (3): 413–38.
22
The time to foreclosure data used by the IMF comes from the World Bank Doing Business analysis which
based on a survey of practitioners on a fictitious case whereby company has too many creditors to negotiate an
informal out-of-court workout. The following options are available: a judicial procedure aimed at the
rehabilitation or reorganization of the company to permit its continued operation; a judicial procedure aimed at
the liquidation or winding-up of the company; or a judicial debt enforcement procedure (foreclosure or
receivership) against the company. The period of time measured is from the company’s default until the payment
of some or all of the money owed to the bank on its secured debt.
23
Kee-Hong Bae and Vidhan K. Goyal , The Journal of Finance, Volume 64, Issue 2 (04), Pages:823-860, 2009.
17
Figure 6 – IRR on Investment in Distressed Assets Time to Foreclosure & Average Time to
Foreclosure and NPLs
Source: A Strategy for Resolving Europe’s Problem Loans – September 2015 – IMF Staff Discussion Note
Enforcement procedures in case of debtor's default are usually of judicial nature (see section
2.2.2), requiring the involvement of the court. Inefficiencies in the judicial system (see
problem driver 2 below) can then slow down the formal foreclosure process, inevitably
reducing the recovery value for banks in case of borrower's default and contributing to the
accumulation of NPLs in banks' balance-sheet. This is particularly the case for banks
operating in Member States where extra-judicial mechanisms allowing for a swift out-of-court
enforcement of collateral are missing or not efficient (see problem driver 1 below).
With the current divergences in the functioning of EU's Member States' collateral
enforcement frameworks - both judicial and extrajudicial - secured creditors need to assess the
impacts of different legal systems on their cross-border exposures. Cross-border lending
transactions require participants to research and comply with many different requirements. In
a cross-border transaction involving collateral located in multiple jurisdictions, this task can
be both complicated and expensive. Securing a loan with the equipment of a multinational
manufacturing company, for instance, requires the creditor to determine and comply with
relevant security rules in each country in which that company maintains operations.
This slows down the recovery, generates excessive costs and constitutes a barrier to cross-
border lending in the Single Market. In particular, due to the current divergences in MS legal
framework, uncertainty or lack of security recognition and the potential obstacles to foreclose
collateral can also be an ex ante deterrent for banks to provide lending and to enforce their
loans on a cross-border basis. When some secured debtors default and the banks are not able
to recover value from these loans, they are exposed to the risk of accumulating NPLs in their
balance-sheet.
6.2 What are the problem drivers?
6.2.1 Absence, inefficiency and fragmentation of out-of-court collateral enforcement
mechanisms in the EU (Problem Driver 1)
Enforcement mechanisms are instruments whose purpose is to ensure that each party to a
contract will stick to the contractual terms. In general, two types of enforcement mechanisms
18
exist in Member States: judicial enforcement and extrajudicial enforcement. In the case of a
secured loan, the issue is not whether the collateral can be enforced but rather under what time
frame, at what cost, and how effectively it enables the creditor to recover value. To be
effective, the costs of enforcement must not outweigh the gains achieved from increased
contractual commitment.
At present, judicial enforcement is the most commonly used enforcement method for secured
loans in EU Member States24
. This means that once the debtor is in default, i.e. has not
honoured its obligations of the loan, the most common way to recover value from collateral
relies in a judicial proceeding. This is the case even in Member States which have established
extrajudicial enforcement mechanisms. When judicial procedures are formalistic,
cumbersome and cannot be resolved in a timely and cost effective manner, banks tend to
reduce the amount of lending because of the uncertainty related to their ability to recover
value from collateral.
Extra-judicial mechanisms to foreclose collateral are a useful alternative way to judicial
proceedings. At EU level a harmonised framework on out-of-court foreclosure has so far only
been established for financial collateral, as per the FCD (see annex 7 section III.A). At
national level, extra-judicial mechanisms to foreclose non-financial collateral are
currently available only in some Member States. Some Member States have implemented
legislative reforms to provide banks with security rights which allow for a swift out-of-court
enforcement of collateral, alleviating thereby the burden on the judicial system (see also
driver 2 below).
Generally three types of out-of-court enforcement procedures exist in the Member States.
Within a given Member State, not all three procedures are usually available. The creditors can
be entitled to:
 "Appropriation" of the asset granted as collateral (the appropriation mechanism).
Under this procedure the creditor acquires the full ownership of the collateral without
a court order for enforcement. The creditor would then be able to keep the asset or to
dispose of it (i.e. sell it) as it wishes;
 Sell the assets by means of a "public sale", meaning they can mandate a public
authority25
to organise a public auction according to general rules, and the creditor will
receive the proceeds;
 Sell the asset by means of a "private sale" on behalf of the debtor and to keep the
proceeds to cover the loss from the defaulted loan; in that case, special rules need to be
in place to make sure the sale happens at a fair market price because the creditor
would be incentivised to sell at just the price needed to cover the outstanding amount
of the loan, including at below market value26
.
24
Academic study: Security Rights and the European Insolvency Regulation - http:// f.wpengine.netdna-
cdn.com/files/2014/07/SREIR-Roman-Legal-Systems.pdf.
25
Except for the judicial authority which is also possible under national laws.
26
In all cases, whether the creditor recovers value in excess of the outstanding amount of the loan, it is foreseen
that the excess amount should be returned back to the borrowing company
19
These three existing out-of-court mechanisms can be triggered under different national terms
and conditions and bring to different outcomes across Member States.
Recent work performed by the SSM27
(and reflecting the views of National Competent
Authorities (NCAs) in the area of banking supervision) shows that the legal frameworks
for collateral enforcement diverge across the SSM. Over one-third of the countries
(mainly in jurisdictions with high NPL levels) consider the topic to be a challenge for
NPL resolution, largely due to the lack of a modern legal framework enabling timely
out-of-court collateral enforcement.
Based on the input provided by the SSM which is complemented by information collected by
the Commission services from Member States' ministries of Justice and publicly available
legal studies, the Commission services performed a mapping of the current situation in
Member States (see Annex 5 for the details and a summary table of the main features). The
following assessment has been done based on the information available:
 Only half of the Member States have in place out-of-court procedures for
collateral enforcement for both security over immovable assets and non-
possessory charge over movable assets;
 Three Member States (Denmark, Greece and Malta) do not have such
extrajudicial systems for collateral under the form of movable and immovable
assets;
 Existing national out-of-court procedures for collateral enforcement are
heterogeneous in terms of the type and features of the enforcement procedures,
the nature and scope of those procedures, the safeguards established to
counterbalance the power given to secured creditors, etc.
By running this legal mapping against the World Bank "doing business" data on resolving
insolvency28
the following correlations have been found (see
Figure 7 and also Annex 4). Although caution should be used in interpreting the data (as
correlation does not mean causality and because the World Bank doing business is based on a
hypothetical case and not on actual data) the following considerations could be derived:
 Member States with out-of-court collateral enforcement mechanisms on both movable
and immovable assets show the highest recovery rates, the lowest time to recovery,
and the best outcome in terms of company preservation (i.e. restructuring instead of
liquidation);
 The opposite could be said about the Member States without out-of-court collateral
enforcement mechanisms;
 Those Member States which have out-of-court collateral enforcement mechanisms
only available for the enforcement of movable assets sit in between the above two
categories of Member States.
27
ECB/SSM - Stocktake of national supervisory practices and legal frameworks related to NPLs – June 2017
28
The methodology and the description of the variables can be found here
http://www.doingbusiness.org/Methodology/Resolving-Insolvency
20
Figure 7 – Recovery rate, Time and Outcome based on the availability of out-of-court
enforcement (for immovable and movable assets) in EU Member States
Source: World Bank Doing Business, Commission services. Note: OOC is out-of-court, recovery rate is in
percentage points, time in years. Time and Outcome are the underlying variables in the calculation of the
recovery rate in the WB DB dataset.
In particular, extrajudicial collateral enforcement faces significant difficulties in cross-border
settings. Such difficulties stem from the lack of recognition of uncertainty in case of conflict
in applicable national law (i.e. international private law). For instance, the complexity can
arise when the asset - especially if immovable - is located in a Member States different from
the Member States whose applicable law governs the loan (as per Rome I Regulation)29
.
Therefore, the complexity/divergent national rules decrease the effectiveness of cross-
border enforcement and further hinder the smooth functioning of a more and more
integrated EU financial market.
6.2.2 Inefficiencies30
of the judicial system in some Member States (Problem Driver
2; out of scope)
As mentioned above, enforcement procedures are usually of judicial nature. In many
countries, there are lengthy, complex and costly court proceedings31
. The sharp rising
29
http://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A32008R0593.
30
As explained in Annex 7 section III.B, the Commission proposal on preventive restructuring and second
chance proceedings is expected to also improve the efficiency of the Member States' judicial systems hence
partially addressing this problem driver
31
Early restructuring and a second chance for entrepreneurs – Factsheet November 2016 – European
Commission.
0
20
40
60
80
100
Both
OOC
Movable
OOC only
No OOC
Recovery rate
Average Median
0
0,5
1
1,5
2
2,5
3
3,5
Both
OOC
Movable
OOC only
No OOC
Time
0
0,2
0,4
0,6
0,8
1
Both OOC Movable
OOC only
No OOC
Outcome
(0: liquidation, 1: restructuring)
21
numbers of insolvencies in some Member States as a result of the financial crises, together
with the lack of efficient and swift out-of-court mechanisms (to enforce the collateral in case
of secured loans), have congested the judicial system, causing long delays in formal debt
resolution. In the majority of EU countries, the average foreclosure period ranges from three
to five years, whereas in some countries they take between 10 and 20 years (Cyprus and
Greece)32
. In Italy for example it takes 40 months for creditors to take possession of assets
posted as collateral33
.
As revealed by a survey conducted by the SSM34
, national competent authorities in the
area of banking supervision, in jurisdictions with high NPLs levels, consider the
inefficiencies of the court systems a challenge for NPL resolution in the majority of the
surveyed countries, mainly owing to the excessive length of proceedings due to the
clogging-up of the courts. The IMF survey35
conducted in 2015 on 19 countries including 9
euro area members36
reveals that the inefficiencies of national judicial systems are viewed as
either a medium or a high degree of concern for debt resolution in nearly two-thirds of
surveyed countries.
According to the RAQ (Risk assessment questionnaire) performed by the EBA, banks
consider lengthy and expensive judiciary processes to enforce the repossession of collaterals37
as one of the main impediments to resolve NPLs (agreement of about 65% as of December
2016 with a significant increase from the previous year). The lack of a market for transactions
in NPLs and / or collaterals is considered as the second most important impediment
(agreement of about 50% in both periods). Annex 8 presents a comparison of the efficiency of
the judicial system in the Member States, based on World Bank data.
6.3 Consequences
The fact that secured creditors cannot effectively and swiftly recover value from their security
rights in case of a corporate borrower' default leads to:
 On the lender side: accumulation of high level of NPLs
 On the borrower side: lending to corporates is somewhat impeded and more expensive
(with possible cross-border spill-over effects).
The sub-sections below provide a detailed explanation and evidence of these two main
consequences.
32
Resolving non-performing loans in Europe – ESRB – July 2017.
33
http://www.italy24.ilsole24ore.com/art/markets/2016-05-04/padoan-192307.php?uuid=ADu9aj.
34
ECB - Stocktake of national supervisory practices and legal frameworks related to NPLs – June 2017.
35
A Strategy for Resolving Europe’s Problem Loans – Technical Background notes - September 2015.
36
The countries that were targeted for inclusion in the survey were those where NPLs (or NPEs) exceeded 10
percent of total loans (or total assets) at any point during 2008-2014. The country survey was completed by 19
countries, including 9 euro area members (Cyprus, Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovenia,
and Spain) and 10 non-euro area countries (Albania, Bosnia and Herzegovina (from two separate jurisdictions),
Croatia, Hungary, Iceland, Romania, Macedonia, Montenegro, San Marino, and Serbia).
37
Including in insolvency proceedings.
22
6.3.1 Accumulation of high level of NPLs (Consequence 1)
The financial crisis and ensuing recessions have left some European countries with high level
of NPLs, and, in some cases, large corporate and household debt overhangs. Annex 7 section
IV describes the size of the problem in the EU with recent figures.
A bank loan is considered non-performing - generally speaking38
- when more than 90 days
pass without the borrower paying the agreed instalments or interest. A performing loan will
provide a bank with the interest income it needs to make a profit and extend new loans. When
customers do not meet their agreed repayment arrangements for 90 days or more, the bank
must set aside loan loss provisions on the assumption that the loan will not be paid back. In a
nutshell, this reduces banks capacity to provide new loans hence:
 i) negatively affecting the overall provisioning of funding to the economy39
(see
section 2.3.2); and
 ii) impeding the good functioning of monetary transmission mechanism by which
central banks intend to influence the aggregate demand, interest rates, and amounts of
money and credit in order to affect overall economic performance.
As also documented by Council’s Financial Services Committee report non-performing
loans40
, the increases in NPL stocks and persistence of high NPL ratios, as a legacy issue, are
generally linked to the deep economic downturn following the global financial crisis and the
slow recovery thereafter. Econometric analysis has documented that real GDP growth is the
main driver of NPL ratios: a drop in economic activity remains the most important
general risk as it weakens borrowers' debt service capacity, particularly for those
borrowers that were overleveraged, leading to an increase in payment arrears and loan
defaults and decrease in bank asset quality. There is a strong correlation between high NPL
and weak economic performances. Real GDP growth and unemployment are two traditional
drivers of NPLs and conversely NPLs also have a detrimental impact on economic growth:
high NPLs reduce profitability, increase funding costs and tie up bank capital, which
negatively impact credit supply and ultimately growth.
In addition to economic drivers, NPL levels are significantly influenced by other factors,
the impact of which is however difficult to quantify, due to the complexity of these factors as
38
The commonly used term “non-performing loan” (NPL) is based on different definitions. The European
Banking Authority (EBA) therefore issued a uniform definition of “non-performing exposure” (NPE) in order to
overcome the problems deriving from the existence of different definitions: non-performing exposures are those
that satisfy either or both of the following criteria: i) material exposures which are more than 90 days past-due;
ii) the debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral,
regardless of the existence of any past-due amount or of the number of days past due. NPE definition is – strictly
speaking – currently only binding for supervisory reporting purposes. Nevertheless, institutions are strongly
encouraged to use the NPE definition also in their internal risk management and public financial reporting.
Furthermore, the NPE definition is used in several relevant supervisory exercises (e.g. SSM asset quality review,
EBA stress test and transparency exercises).
39
For example according to EBA's Report on Funding Plans 2017 there is a correlation between NPL ratio as of
2016 and loan growth forecast for 2017 at bank level with especially less capitalised banks being more sensitive
to the NPL ratio than higher capitalised banks when considering extending new (household and non-financial
corporations) lending.
40
http://data.consilium.europa.eu/doc/document/ST-9854-2017-INIT/en/pdf
23
well as a lack of comparable and counterfactual data and country-specific or bank-specific
features. These include, but are not limited to, banks' lending and monitoring policies,
supervisory action, accounting standards, transparency of market for collateral assets, banks'
capacity to deal with NPLs with the appropriate expertise, underdevelopment of distressed
debt markets, tax regimes, and the efficiency of legal and judicial systems including
insolvency frameworks.
With regards to the latter, in some Member States, the sharply rising numbers of bankruptcy
or restructuring cases have also strained the judicial system, causing long delays in formal
debt liquidation. As a consequence, NPLs were kept on balance sheets longer, aggravating
their impact on bank profitability and long-term viability. NPLs impact bank profitability in
manifold ways. NPLs imply higher provisioning needs and therefore absorb bank capital and
lower operating income. Net profits are further reduced by the greater need for human
resources and higher administrative expenses to monitor and manage the NPL stock.
Profitability can also be reduced by higher funding costs for banks as concerns about asset
quality challenges are associated with higher risk premia on bank liabilities. One way for
banks to manage these balance sheet risks is through setting up adequate loan loss provisions
which are liabilities set aside as an allowance for uncollected loans and loan payments
covering a number of factors associated with potential loan losses including bad loans,
customer defaults and renegotiated terms of a loan that incur lower than previously estimated
payments.
On top of loan loss provisions, in case of secured debt, banks can cover their NPLs with
collateral. Nevertheless as explained in the drivers section, while being a key tool to secure
the repayment and/or recovery of a loan, acquisition of collateral is often a lengthy and
costly process eroding the net present value of the collateral concerned. This then not
only influences a bank’s ability to commence legal proceedings against borrowers or to
receive assets in payment of debt but also affects collateral execution costs in loan loss
provisioning estimations (i.e. requiring higher loan loss provisions hence negatively
impacting the level of profits and capital ratios).
In order to deal with their stock of NPLs, banks can deploy essentially three different
strategies: (i) collection of the due amount, (ii) sale to third parties investors and (iii)
restructuring of the loans.
(i) As explained in the drivers section the collection approach, which includes the
enforcement of collateral in case of secured loan is dependent on the efficiency of the
legal system to provide the creditor with tools to enforce its loan within a reasonable
time. However as argued also by the IMF41
, the long delays in collection and the low
rates of recovery also affect the other two approaches to deal with NPLs.
(ii) With regards to the sale to third party investors strategy, the current low levels of
trading in NPLs on secondary markets can be explained to a large extent by substantial
41
IMF Working Paper WP/16/134 – José Garrido
24
information asymmetries intrinsic to this kind of markets42
. However, there is a clear
impact of the time of recovery of claims on the price of NPLs increasing the "bid/ask"
spreads: the delays depreciate the value of the NPLs, and the prices buyers are ready
to pay, after discounting the delays, are not attractive for the banks. The data on the
size of that gap is scant but it is thought to be very large. For instance, estimates
suggest that, for a fully collateralised non-performing loan, the discount required by a
private investor may exceed 40% solely due to the cost, time and uncertainty of the
recoveries43
. Long time to recover loans has hence a negative impact on the price of
NPLs. A recent study44
tried to quantify what would be theoretically the increase in
the price of the NPLs as an effect of the reduction in time to enforce NPLs. According
to their model, the authors conclude that a reduction in the time of recovery from six
years to five years would increase the price of NPLs from 12.9 percent to 16.1 percent
of the gross book value of the loans (the model assumes an internal rate of return of 20
percent). A reduction to four years would raise the price to 19.8 percent, to three years
would set a 24.4 percent price, to two years to 29.8 percent, and if the collection time
would be reduced to one year, the estimation is that the price of NPLs would reach
36.3 percent of the nominal value of the loans.
(iii) Finally, the delay in enforcement also interferes with debt restructuring strategies. As
a consequence to avoid an increase in NPLs and defaults, some banks choose to renew
high-risk loans that they would otherwise not renew hence subtracting potential
lending to new viable projects.
6.3.2 Lending to corporates is impeded and more expensive including cross-border
spill-over effects (Consequence 2)45
As already mentioned in the section above, high NPLs reduce bank lending to the real
economy. The figure below (Figure 8) shows how visible the contraction in bank lending has
been for NFCs in Category 3 Member states (as explained in Annex 7 – section IV these are
countries with currently high level of NPLs). Although it is not easy to disentangle the credit
supply from the credit demand effects the reduction in the former is linked to the several
(supply) factors affecting banks:
 Lower available capital. Because of their high risk weight, (especially
uncollateralised) NPLs tie up substantial amounts of capital, which in turn reduce the
room for expanding credit or raise the cost of doing so.
 Lower profitability. The necessity of provisioning for NPLs reduces banks' net income
and the reduced returns on NPLs also reduce profits. Reduced profits in turn result in
fewer loans, other things being equal.
42
On the demand side, banks’ informational advantage over investors on the quality of loan portfolios and
prospective recoveries may deter potential market activity. Moreover, barriers to entry such as licensing
requirements further inhibit the market. On the supply side, banks may be insufficiently capitalised to recognise
loan losses, or they may want to wait for an economic recovery before reducing their NPLs (EFSIR 2017)
43
Keynote speech by Vítor Constâncio, Vice-President of the ECB, at an event entitled "Tackling Europe's non-
performing loans crisis: restructuring debt, reviving growth" organised by Bruegel, Brussels, 3 February 2017
44
Ciavoliello, L. G., Ciocchetta, F., Conti, F.M., Guida, I., Rendina, A., and Santini, G., 2016, “What’s the
Value of NPLs?”Notes on Financial Stability and Supervision, No. 3. (Banca d’Italia).
45
This section is mainly derived from a Commission DG ECFIN analysis "A macroeconomic perspective on
non-performing loan" – 2016.
25
 Higher funding costs. Debt issued by banks with a high burden of distressed assets is
perceived as riskier, and a premium is therefore required by bondholders. Uncertainty
on the asset quality of individual banks may also limit their access to wholesale
funding.
 Monitoring and servicing costs. The need to monitor distressed borrowers raises
banks' operating costs.
Figure 8 – MFI lending to non-financial corporations, EU (2010Q1-2016Q1)
Source ECB, DG ECFIN calculations
The contraction in lending has been stronger for NFCs than for households46
possibly
reflecting also the average shorter residual maturities of corporate loan books which translate
into greater volatility of loan stocks and greater deleveraging opportunities compared to
household mortgage lending.
Moreover it is noteworthy that this decrease in lending seems to have taken place after the
spike in NPL ratios (in 2012/2013) when banks had to build up their provisioning in reaction
to an increase in nonperforming exposure in their loan book. In Category 2 Member States,
lending to NFCs started to pick up again (since the first quarter of 2015) in line with
decreasing NPL ratios, thus highlighting remarkable differences in behaviour across
categories of countries.
Problems associated with a high ratio of NPLs in the banking sector have a bearing not
only on the availability of bank lending but also on the cost of credit to NFCs. Indeed, in
order to compensate for the costs derived from the stock of NPLs (including the lower
recovery rates from lengthy and costly enforcement procedures) banks may charge higher
interest rates and tighten credit standards creating a vicious circle, whereby an increased cost
of debt for the non-financial sector translates into a higher incidence of financial distress, thus
propelling further increases in costs and reductions in the volume of credit47
. As shown below
(Figure 9) there is a clearly divergence of lending rates for NFCs in the EA countries affected
by the financial crisis. Monetary policy transmission in the EA is then negatively affected by
elevated NPL ratios in particular given the dominance of bank lending in the financing of
European corporates.
46
The lending contraction for households over the same period never exceeded 1.5%.
47
Hou, Y. and D. Dickinson (2007), “The Non-Performing Loans: Some Bank-level Evidences. Research
Conference on Safety and Efficiency of the Financial System”.
26
Figure 9 – Cost of borrowing for NFCs, EA (Jan 2007-Oct 2016, in %)
Source ECB Note: Countries most affected by the financial crisis include Cyprus, Greece, Ireland, Italy,
Portugal, Slovenia and Slovak Republic
High NPLs levels, despite being present in a subset of EU countries, are an issue for the
entire EU owing to a range of important cross-border spill-overs48
.While there are strong
benefits from financial integration in the EU in terms of risk diversification, in such a deeply
integrated area, economic and financial difficulties in one Member State can also have a
bearing on other Member States even outside of an acute crisis situation. The spill-over
effects can arise both within the banking sector and between the banking and non-banking
sectors. Banking spill-overs relate to banks' cross-border lending activities and cross-border
ownership links (see below). Furthermore, indirect channels relate to the overall deterioration
of the macroeconomic environment in high-NPL countries, which affects other countries
through lower import demand (trade channel) and a loss of value of equity and debt claims on
residents of the affected countries (financial channel).
With regards to cross-border lending spill-over effects can take place either via domestic bank
lending or the lending of foreign banks. Spill-overs via domestic banks occur when the
increase in the NPL ratio in a foreign banking sector is affecting the loans handed out by
domestic banks operating in that foreign market and these banks are subject to the same
structural deficiencies that prevent a timely resolution of NPLs in the foreign country. In this
case, the NPL exposure in the foreign market can tie up risk capital, which is not available for
lending activities in the banks' home market. Spill-overs via foreign banks, on the contrary,
occur when banks in one Member State feel compelled to cut back their cross-border lending
activities, due to the constraints they face because of high NPLs in their domestic loan book,
and thereby reduce credit supply in other Member States. Unless the impact on lending in the
home countries of the affected banks is compensated by an increase in lending from
competitors, both channels lead to a situation in which problems associated with high NPLs in
one Member States can have an impact on credit supply in other Member States.
While it is impossible to verify and quantify empirically the aforementioned channels of
cross-border spill-overs, it is nevertheless possible to assess at least which Member States
could be more vulnerable to such spill-over effects due to a relative larger cross-border
exposure of bank assets. By looking at the Bank for International Settlements (BIS) data on
cross-border net risk transfer49
:
48
Resolving non-performing loans in Europe – July 2017 – ESRB.
49
See table I.2 and I.3 of Commission DG ECFIN analysis "A macroeconomic perspective on non-performing
loan" – 2016.
27
 With regards to domestic channel and taking Category 3 Member States one finds that
for example Romanian banks seem to exhibit an elevated exposure to Greece (5.8% of
Romanian GDP) or UK banks to Ireland (32.4% of UK GDP) and German banks to
Italy (9.3% of German GDP)
 With regards to foreign channel, the data shows that for example Croatia, Austria and
Hungary appear to be particularly exposed to a change in lending policy by Italian
banks or Croatia, Czech Republic and Slovakia are linked to lending policy in Austria
or Latvia, Lithuania, Estonia, Denmark and Finland could become considerably
affected if Swedish banks were to cut back their cross-border activities
6.4 How will the problem evolve?
Without policy intervention, the current divergence between Member States' banking systems'
ability to manage and resolve NPLs, and the subsequent effect on access to finance, will not
be addressed and might even widen.
As a result, only banks operating in Member States where efficient collateral enforcement
mechanisms exist will have appropriate tools to mitigate risks of future accumulation of NPLs
(and possibly also manage the current stockpile of NPLs50
). Member States where those
mechanisms do not exist or are not properly functioning will run the risk of seeing lending to
the economy being curtailed or made more expensive in future episodes of adverse economic
conditions, as shown by the recent financial crisis in Member States with high levels of NPLs.
Moreover, banks operating cross-border will continue to face fragmented collateral
enforcement frameworks and will need to assess the impacts of different legal systems
causing unnecessary costs and constituting a barrier to cross-border lending in the Single
Market.
From a debtor’s perspective, with the absence of out-of-court enforcement mechanisms and
given the lengthy formal proceedings, the issue of moral hazard will persist. As debtors might
be well aware that the collateral will not be easily and quickly enforced, they could be less
incentivised to comply with their loan obligations or try to resolve their financial distress with
the creditors in a timely manner51
.
Finally, a deeply integrated area like the EU (and even more so within the euro area) could
see important cross-border spill-overs of future NPL problems in some Member State on other
Member States.
50
In case of renegotiation of some of the loans currently non-performing.
51
At the same time, even if the borrower is willing to pay, its actual ability to do so depends also on external
factors.
28
Problem tree
7 Why should the EU act?
7.1 Legal basis
Article 114 of the Treaty on the Functioning of the European Union (TFEU) confers the
European Parliament and the Council the competence to adopt measures for the
approximation of the provisions laid down by law, regulation or administrative action in
Member States which have as their object the establishment and functioning of the internal
market. Article 114 TFEU allows the EU to take measures not only to eliminate current
obstacles to the establishment and functioning of the internal market, but also to address
barriers that dissuade economic operators from taking full advantage of the benefits of
that market (in particular investing in other Member States).
7.2 Subsidiarity - Necessity of EU action
The previous section has shown that banks which grant secured loans to companies and
entrepreneurs do not benefit in all Member States from expedited and effective procedures to
enforce such loans out-of-court in case of corporate borrower's default. There is no minimum
set of tools available across Member States for out-of-court collateral enforcement. Should
such tools be available, the risk of banks accumulating NPLs would decrease.
In order to recover value from collateral posed by a borrower in a different Member State, the
lender has to follow rules which are different from the rules of the lender's home Member
State, and the efficiency of which is unknown to the lender. This creates costs with legal
29
advice and can mean longer duration of recovery procedures, and lower recovery rates. The
prospect of recovering less, or at worst, nothing, from a secured loan in case of debtor default
can deter lenders from lending cross-border in the first place, or it can increase the price of
lending for companies. This in turn constitutes a deterrent for borrowers for turning to lenders
in different Member States. This obstructs the free movement of capital and has a direct effect
on the functioning of the single market. There is untapped CMU potential in terms of making
funding available to companies, SMEs in particular, which are highly reliant on bank lending.
Similarly, investors considering to buy portfolios of non-performing loans will take into
consideration potential legal uncertainties in value recovery from the collateral attached to
these loans, and if value recovery cross-border is more difficult or comes with legal
uncertainties, this will negatively impact the price, and by consequence, the chance of banks
to sell portfolios also to investors from a different Member State as close as possible to the
price determined by banks' provision for those loans52
.
On that basis, the European Union has a right to act to improve the conditions for creditors
(both banks and investors) and companies/entrepreneurs as borrowers. Establishing a
framework on efficient out-of-court collateral enforcement procedures would ensure that
secured creditors in all Member States benefit from an additional tool to recover value from a
secured loan in case a corporate borrower does not pay on the loan.
7.3 Subsidiarity - Added value of EU action
An EU action would:
i. Reduce spill-over effects in the whole EU due to NPLs accumulation in parts of the
EU (i.e. when NPL problems in one Member State affect negatively the lending and
the economy in other Member State) and increase banking sector stability  As
explained in section 2.3.2, the high interconnectedness within the EU (and especially
Eurozone) financial system creates a significant danger of spill-overs entailing
systemic risks which are better addressed at EU level. This is particularly relevant for
the Banking Union, but also to the non-euro area Member States, given that banks
operate in multiple jurisdictions. Increasing the stability of the banking sector with the
development of a common extra tool for dealing with the accumulation of NPL could
also contribute to some extent to addressing the risk of a revival of the ‘diabolic loop’
between banks and sovereign risk (whereby the concerns about banks' NPL levels and
hence their strength affect the cost of governments' borrowing and vice-versa) that was
at the heart of the recent European financial crisis;
ii. Help the scaling-up at EU level of secondary market for NPLs (which is needed when
the strategy adopted by banks is to sell the NPLs portfolio to specialised investors)
through economies of scale  Ensuring that efficient out-of-court enforcement
mechanisms are available in all Member States, as explained in section 3.2.1, would
reduce the bid-ask spreads in a given Member States. Moreover, a common set of
features of such mechanisms across the EU would facilitate price discovery,
52
If a bank has provisioned 30% of a non performing loan, then it disposes the loan at a value lower than 70%,
this will result in a further loss for the bank
30
transactions and greater liquidity in loans markets53
by pan-European investors which
will be able to operate under similar conditions across the EU through economies of
scale.
iii. Create incentives for more cross-border lending by reducing uncertainty about the
outcomes of enforcement proceeding (e.g. recovery rate and time) in cross-border
transactions.
The objectives pursued by these measures as discussed above can be better achieved at EU
level rather than by different national initiatives. The necessity to act is even stronger in the
Eurozone. As shown in section 2.3.1, lending availability and cost of credit for corporates is
more tightly related to NPLs level in a given country.
The proposal also provides for proportionality as the tool will be tailored to achieve the
objective of ensuring the proper functioning of the single market. Given the inherent links
between collateral enforcement and Member States' civil, property, commercial, pre-
insolvency, insolvency and public laws, the envisaged rules on extrajudicial collateral
enforcement would need to be able to be implemented in a way that is consistent with those
Member States' laws. All policy options will therefore be assessed with regards to their
compliance to the principle of proportionality.
8 Objectives: What is to be achieved?
In light of the concerns outlined in the previous chapters, two general objectives will be
pursued, which in turn can be articulated into one common specific objective:
 Reduce future levels of secured NPLs in banks' balance sheets (general objective 1) –
elevated levels of non-performing loans affect financial stability as they weigh on the
profitability and viability of the affected institutions and have an impact, via reduced bank
lending, on economic growth. As a result, NPLs have a negative impact on both the
functioning of the Banking Union and on the creation of a Capital Markets Union. The
reduction of future levels of secured NPLs in banks' balance sheet (to which this initiative
and others in the "NPL package" would contribute) is then paramount and is then the first
general policy objective of this initiative.
 Facilitate more lending to corporates and at lower cost, including on a cross-border
basis (general objective 2) – While general objective 1 is linked to the stability of the
banking sector and better functioning of the lending activities, general objective 2 focuses
instead on the other contractual party of any lending transaction i.e. borrowers. The two
objectives (like the two mirroring consequences) are obviously connected as risk reduction
for the banks in turn create incentives for banks to lend more (i.e. hence increasing the
supply of financing available) and at better pricing conditions (including lower borrowing
costs) both domestically and on a cross-border basis.
53
As explained by "Analysis of developments in EU capital flows in the global context – Bruegel – September
2017" there are no formal restrictions in the legal and regulatory frameworks that would impede the entry of
NPL investors, and their acquisition of assets but investors are discouraged to enter certain markets due to the
range of obstacles in loan enforcement and liquidation like the lengthy recovery procedures, the uncertainty over
their evolution and costs of these procedures.
31
 Enable secured creditors to effectively and swiftly recover collateral value in a
standardized way across the EU when business borrowers default on secured loans
(specific objective) – The specific objective, common to the two general objectives, is to
equip banks operating in any of the Member States of EU with the possibility of recovering
value in a default situation through effective and speedy out-of-court collateral
enforcement mechanism governed by harmonized rules and principles.
Table 1 – Intervention logic diagram
Problem and consequences General and specific objectives
Consequence 1 - Build-up of non-
performing business secured loans in banks'
balance sheets
General objective 1 - Reduce future levels
of secured NPLs in banks' balance sheet
Consequence 2 - Slowdown in credit lending
and higher borrowing costs for business
borrowers including on a cross-border basis
General objective 2 - Facilitate more lending
to corporates and at lower costs, including
on a cross-border basis
Problem - Inability for banks to recover
effectively, swiftly and seemingly across the
EU collateral value when business
borrowers default on secured loans
Specific objective - Enable secured creditors
to effectively and swiftly recover collateral
value in a standardized way across the EU
when business borrowers default on secured
loans
9 What are the available policy options?
9.1 What is the baseline from which options are assessed?
The expected evolution of the problem and of its consequences is discussed in section 6.4.
Under the baseline scenario, no material revision of Member States' existing collateral
enforcement procedures is expected.
To quantify the aggregate economic outcomes in the baseline case, the Commission services
prepared a stylised scenario for future NPL levels (as the main effect of this initiative would
be on future stocks) that could be reached in a future adverse economic episode in each EU
Member State (see annex 4 for details about the methodology). The scenario uses country-
specific benchmark NPL levels from historical data and applies a number of EU-level average
parameters (e.g., share of corporate in total NPLs, share of SMEs in corporate NPLs, etc.) to
end up with estimated levels of secured corporate NPLs for each Member State. The scenario
should be seen as an illustration of possible future NPL levels following a severe economic
shock, rather than as the forecast of NPLs in the next economic downturn.
In the stylised scenario, the level of corporate NPL that are secured by collateral would
reach EUR 463 bn, of which about EUR 221 bn would be associated with SMEs. The
recovered value from these NPLs under the baseline and the three policy options is estimated
by applying on this stock the modelled recovery rates (see also annex 4). In the baseline it is
assumed that recovery rates would stay at their current level (unweighted EU average of
67.7%, EU median of 71.7%), which would lead to the recovery of EUR 346 bn for secured
creditors. The access to finance for EU businesses, in particular for SMEs, and the
32
associated costs would remain heterogeneous across Member States, with slow convergence
as the financial fragmentation recedes.
9.2 Description of the policy options
A total number of five policy options have been explored of which three are retained for
further analysis and comparison and two are discarded at this stage. The former are described
in detail in this section whereas the latter in the following section.
9.2.1 Scoping the policy options
The scope of the three retained policy options for extrajudicial enforcement procedure will be
limited to loans originated by credit institutions which are granted to companies or
entrepreneurs (i.e. business to business relationship). At origination, the out-of-court
enforcement procedure should therefore be restricted to only secured business loans, meaning
loans between a credit institution, as creditor, and a business borrower (i.e. a company or a
sole entrepreneur)54
, as debtor. Given the very strong social impact that an out-of-court
enforcement procedure would have on consumers, such as potentially depriving a natural
person of his or her main residence, or of assets which have more intrinsic value for the
debtor as they are valued on the market, or are needed for daily subsistence such as furniture,
natural persons as consumers would be excluded from its scope. The public consultation
showed overall support55
for this approach given the need for special protection for the
weakest party.
On the creditor's side, because of the financial stability motivation of the work on out-of-court
collateral enforcement whose primary goal is to avoid the problems of accumulation of NPLs
on banks' balance sheets, it is envisaged to only include banks (credit institutions as
defined in EU law) and loans originated by them in the scope of this initiative. Moreover,
there is a need to ensure that the scope of this initiative is aligned with that of the broader
legislative package which this initiative forms part of, i.e. the package aimed at addressing the
NPL issue, as announced in the 2017 Commission Communication on Banking Union.
Therefore, given that the EU dimension to reducing current NPLs as well as preventing future
build-up of NPLs is aimed at addressing a banking problem, the envisaged scope of the
initiative is to encompass loans originated by banks. Tackling the NPL issue for banks would
improve the stability of the banking sector and would enable banks to make more credit
available to companies, SMEs in particular. Banks would be able to better play their role in
financing the economy. Moreover, it is established case-law that the principle of equality
before the law, set out in Article 20 of the Charter of Fundamental Rights of the European
Union, is a general principle of EU law which requires that comparable situations should not
be treated differently unless such different treatment is objectively justified. A difference in
54
At credit origination, inclusion of the enforcement mechanism would require agreement by the counterparties,
i.e. be voluntary. At a later stage, one the requirements for triggering the mechanism are met, the creditor would
still have discretion as to whether or not trigger the mechanism.
55
This included the banking sector, investors and loan servicing companies, government and public authorities
and consumer associations, NGOs and private individuals.
33
treatment is justified if it is based on an objective and reasonable criterion, that is, if the
difference relates to a legally permitted aim pursued by the legislation in question, and it is
proportionate to the aim pursued by the treatment56
(cf. ECJ case-law). In the case of out-of-
court enforcement, the focus on banks as secured creditors and loan originated by banks
would be justified by the need to ensure that these entities do not accumulate high amounts of
NPLs so that they remain capable of making credit available to companies and the real
economy at large.
As regards the types of assets which corporate borrowers give as collateral, the scope of the
policy options would include movable and immovable tangible/concrete/material assets
(e.g. right in rem)57
owned by the debtor or an affiliate or subsidiary. As regards the types of
security rights which could be used, as explained further down, options 1 and 2 envisage
using existing security rights in the Member States (i.e. pledge, mortgage, non-possessory
pledge, floating charge, etc.), while option 3 envisages the establishment of new security right
which would be added to the existing national catalogue of security rights. However for all
the three options, this instrument could not be invoked against certain categories of real
estate properties, such as the main residence of the debtor, even where such asset
guarantees a business debt.
9.2.2 Option 1 - Non-regulatory action based on existing international
harmonisation initiatives of extrajudicial collateral enforcement procedures
Under this policy option, the Commission would recommend Member States to put in place
extrajudicial enforcement procedures to recover value from secured loans in case such
procedures do not exist or to enhance the effectiveness of existing ones, in particular where
they are not used in practice because they are inefficient. Such set of recommendations would
be inspired by Member States' out-of-court collateral enforcement procedures which work
well (e.g. because they optimise the value recovery through a speedy procedure) and by a
number of international initiatives in the area of secured transactions, which include
recommendations on enforcement of security rights and collateral.
As a matter of fact, the field of secured transactions has been in the past two decades at the
centre of a number of international harmonization initiatives ranging from instruments
intended to become legally binding to broader soft law initiatives such as:
56
ECJ judgement of 17 October 2013, Schaible, C-101/12, EU:C:2013:661, paragraphs 76 and 77; ECJ
preliminary ruling in case C-156/15, 'Private Equity Insurance Group' SIA v 'Swedbank' AS, 10 November 2016.
57
The policy initiatives would be considered as part of a category known in some Member States of Roman Law
tradition as "rights in rem". Right in rem, meaning that the asset given as guarantee is only a "concrete",
"material" asset (res) and cannot be, for instance, a financial instrument, or other form of "personal"
guarantee/warranty that involves the obligation of a third-party guarantor to pay the creditor in case of the
borrower's default. Likewise, ACE will not be available for collateral over Intellectual Property and other
intangible assets. The ACE would also not apply to financial collateral as regulated by the Financial Collateral
Directive http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32002L0047.
34
(i) The 2010 Legislative Guide on Secured Transactions by the UN Commission on
International Trade Law 58
and the more recent 2016 UNCITRAL Model Law on
Secured Transactions59
discussing policy issues and containing recommendations
including some useful suggestions on out-of-court enforcement of security rights60
with the aim of paving the way to domestic law reform .
(ii) Principles, definitions and model rules of European Private law Draft Common Frame
of Reference (DCFR) prepared by the Study Group on a European Civil Code and the
Research Group on EC Private Law (Acquis Group)6162
. It contains a section on
"Extra-judicial enforcement"63
.
(iii) The European Bank for Reconstruction and Development (EBRD) Model Law on
Secured Transactions (MLST)64
aims at facilitating the transition to capital market
economies and the introduction of efficient systems of security rights in Central and
Eastern European Countries65
. It provides useful definitions and provision to structure
the out-of-court proceeding (e.g. as per the role of the judicial court).
The recommendation would focus on five areas:
1) Nature – This policy option would recommend Member States to ensure that an out-of-
court procedure for the enforcement of collateral is available to banks in all Member States.
Such mechanism would be recommended to be used upon voluntary agreement by the parties
in relation to existing security rights in the Member States, in order to enable the creditor to
enforce collateral swiftly and at lower cost. Moreover, even if the use of the AECE is
voluntarily agreed by the contractual parties, it would be recommended not to be mandatory
for the bank to use it where the borrower is in default. It will be up to the bank to assess
whether or not it wishes to use this instrument.
2) Procedural features – it will be recommended that:
 The secured creditor may recover value from the encumbered assets by an out-of-court
proceeding, provided that (i) the debtor has consented ex ante to extrajudicial
enforcement in the security agreement, (ii) the secured creditor has given the debtor
and any person in possession of the encumbered asset notice of default and of its
intention to seek to enforce their right out-of-court66
;
58
UNCITRAL - art. 131-177; https://www.uncitral.org/pdf/english/texts/security-lg/e/09-82670_Ebook-
Guide_09-04-10English.pdf, Chapter VIII, p. 310.
59
http://www.uncitral.org/pdf/english/texts/security/ML_ST_E_ebook.pdf
60
Chapter VIII, p. 310.
61
Based in part on a revised version of the Principles of European Contract Law and published in 2009
62
http://ec.europa.eu/justice/contract/files/european-private-law_en.pdf.
63
http://ec.europa.eu/justice/contract/files/european-private-law_en.pdf, p. 4715.
64
Published in 2004 and then in 2010
65
EBRD Model Law on Secured Transactions (MLST) - http://www.ebrd.com/news/publications/guides/model-
law-on-secured-transactions.html. "the Model is not intended as detailed legislation for direct incorporation into
local legal systems. It is, however, intended to form the basis for national legislation". Other useful example
could be (iv) Organisation of American States (OAS) Model inter-American Law on secured transactions
published in 2002.
66
Based on UNCITRAL Guide (art. 131-177)
35
 Obligations of secured creditors to act in good faith and follow commercially
reasonable standards when enforcing their rights67
;
 Enforcement is to be undertaken by the secured creditor in a commercially reasonable
way and as far as possible in cooperation with the security provider and, where
applicable, any third person involved68
;
 The rights of secured creditors to enforce out-of-court should be subject to judicial or
other official control, or review of the enforcement process (e.g. debtors should be
entitled to request courts to confirm, reject, modify or otherwise control the exercise of
a creditor's enforcement rights)69
;
3) Publicity requirements – Transparency is necessary to make third parties aware that an
asset is charged by a security right, in particular but not only in the case of real estate. When
the use of an out-of-court procedure is foreseen by agreement between a bank and a corporate
borrower, third parties should be informed about the right of the creditor to enforce the loan
by means of an out-of-court enforcement. That is why it is important to make public the
bank's ability to use it, for example by registration in the relevant national public registers or
equivalent forms of publicity. Under this option, one of the recommendations to Member
States would be that the ability of a secured creditor to enforce collateral through an out-of-
court enforcement procedure would be subject to registration in the relevant national public
registers or equivalent forms of publicity. Member States would not have to put in place a
specific procedure for this purpose, but they would be recommended that the out-of-court
enforcement procedure follow the specific publicity requirements which apply in a Member
State, depending on the type of security right in relation to which such an enforcement
procedure could be used.
4) Transferability – the recommendation would invite Member States to ensure that the right
to extrajudicial collateral enforcement is transferable with the security right, in order to foster
the development of secondary markets for NPLs. In particular, where a secured loan equipped
with an out-of-court enforcement procedure is sold by the bank to a third party, that third
party (which may or may not be a credit institution) would be able to enforce collateral out-
of-court in case of borrower's default (under the same conditions as the originating bank).
5) Insolvency and restructuring - The Commission would recommend that any out-of-court
enforcement procedures remain fully consistent with and complementary to the Commission
proposal on preventive restructuring and second chance.
Legal instrument – based on the above provisions, the Commission would set up general
high-level principles and/or provisions through a Recommendation addressed to Member
States. Such recommendation would specify common criteria of out-of-court enforcement
proceedings (e.g. better ways to safeguard both parties' interests to ensure balance and
fairness in the collateral foreclosure). The EU recommendation, a non-binding legislative
instrument, would leave Member States the freedom whether to implement it and how to
67
Based on UNCITRAL Guide (art. 131-177)
68
Based on DCFR (Book IX - 7:103)
69
Based on UNCITRAL (art. 131-177)
36
frame the extrajudicial enforcement mechanism by means of specific contractual or statutory
solutions and procedures in compliance with their legal system.
9.2.3 Option 2 - Minimum harmonisation of extrajudicial collateral enforcement
procedures
This option would require all Member States to provide for an extrajudicial collateral
enforcement procedure for secured loans, which would be based on a set of common
principles. Member States that currently lack or have different forms of extrajudicial collateral
enforcement procedures would have to introduce such mechanism in their national legal
framework or align the system in place with the minimum standards of harmonisation, as set
up by the EU common principles.
Member States would provide creditors with an extrajudicial procedure to enforce collateral
in case of debtors' default. This out-of-court mechanism would be "attached" to security rights
already existing in Member States (such as mortgages and pledges) and would serve as a
standard way to recover value from collateral. This option would therefore establish a number
of minimum criteria at EU level for the out-of-court collateral enforcement, in order to ensure
better levels efficiency, consistency and predictability in all Member States. This means in
practical terms that when a loan is secured by collateral and the debtor defaults on its
obligations set up in the loan agreement70
, such harmonised enforcement mechanism would
allow creditors to recover value from collateral without the prior full involvement of a court,
and in a standard way and timing across EU. The purpose of the initiative is to make sure
creditors can use an alternative to the judicial enforcement (if absent in national legislation),
and/or to improve the current out-of-court procedure (where existing) in a consistent manner
across Member States. Whilst the general rules would be established at EU level to ensure
coherence and consistent application, the detailed implementation of the rules would be
established in national law.
A possible EU framework establishing a common set of provisions on such out-of-court
procedures is called for the purpose of this impact assessment Accelerated Extrajudicial
Collateral Enforcement (AECE). The EU framework would focus on five areas:
1) Nature – This policy option would introduce an obligation for Member States to ensure
that an out-of-court procedure for the enforcement of collateral is available to banks in all
Member States. The AECE would not establish a new security right (as per option 3 below),
but rather a mechanism which could be used upon voluntary agreement by the parties in
relation to existing security rights in the Member States, in order to enable banks to enforce
collateral swiftly and at lower cost. The use of AECE would not be mandatory for the parties
to a loan agreement, i.e. bank and a company or entrepreneur. If the parties agree to give the
creditor the possibility to use AECE in case of corporate borrower's default, unless
70
In the West's Law&Commercial Dictionary a loan is defined as a "delivery by one party to and receipt by
another party of sum of money upon agreement, express or implied, to repay it with or without interest". Loan
should be understood as including the various types of credit which banks grant corporates, such as credit
revolving (etc.).
37
restructuring is triggered, then the national rules which implement the EU framework would
apply, together with any other relevant national private and public laws.
2) Procedural features – The conditions which allow the bank to trigger the AECE would be
defined as the borrower’s default in repaying the loan. Moreover, the proposal would require
Member States to make extrajudicial enforcement through private sale available to secured
creditors. The availability of other enforcement methods, in particular public sale or
appropriation, would be optional. The core features of the AECE would therefore be (i) out-
of-court enforcement; (ii) procedural standards.
(i) out-of-court enforcement: in case of private sale, the bank will be charged to sell
the assets on behalf of the debtor with the purpose to recover the maximum value from
the sale. For the other enforcement options, public sale will be regulated mainly by
national rules, while appropriation will be built along the lines specifically discussed
under option 3.
(ii) procedural standards: any sale methods as envisaged by the AECE would have to
follow a set of common high-level principles of fairness, transparency and efficiency,
while the specific details of the procedure would be left to Member States.
The debtor should be able to contest and raise objections to the use of the AECE and the value
obtained following its use. This translates into the debtor's right to challenge the AECE before
a judicial court. Member States should be able to decide on the suspensive effects of such
appeals. Finding the right balance between the power of the court and such extrajudicial
enforcement should be left to Member States.
Regardless of the type of enforcement procedure which is used (private or public sale,
appropriation), the creditor should have the obligation to pay back to the debtor the difference
between the value of the asset (as per amount obtained from the sale or the estimated value in
case of appropriation) and the amount owed as at the time of execution of the AECE (in case
the latter is higher than the former). If this difference is negative, the possibility of datio in
solutum / debtor's discharge (i.e. debtor not liable for the shortage) should be addressed at
national level, together with any other solution consistent with Member States legal
framework.
Given that this option does not foresee the introduction of a new security right, the AECE
would not change the existing hierarchy of security rights in enforcement proceedings and
would not affect Member States' rules that might privilege some special categories of
creditors (e.g. workers, taxpayers etc) in insolvency proceedings.
3) Publicity requirements – Transparency is necessary to make third parties aware that an
asset is charged by a security right. When the use of an AECE is foreseen by agreement
between a bank and a corporate borrower, third parties should be informed about the right of
creditor/bank to enforce the loan by means of an out-of-court enforcement. That is why it is
important that the bank's ability to use AECE be made public, for example by registration in
the relevant national public registers or equivalent forms of publicity. To minimise any impact
38
on national registration rules for security rights, this option would set as a rule that the AECE
would the subject to the same publicity requirements as those established under each Member
State legal framework for the security right which is equipped with AECE. That is because
AECE would not be a new security right which might require new, specific publicity, but a
mechanism which follows existing security rights. This means that Member States would not
have to put in place additional transparency requirements for the publication of AECE, other
than those applicable, if any, for the publication of the security right which is equipped with
AECE.
4) Transferability – this option will introduce an obligation to ensure that the right to
extrajudicial collateral enforcement is transferable with the security right, in order to foster
the development of secondary markets for NPLs. In particular, where a secured loan equipped
with AECE is sold by the bank to a third party, that third party (which may or may not be a
credit institution) would be able to use AECE in case of borrower's default (under the same
conditions as the originating bank).
5) Restructuring and insolvency – The AECE will remain consistent with and
complementary to the Commission proposal for a Directive on preventive restructuring and
second chance COM (2016) 72371
. This should be ensured in particular through the principle
that once a restructuring proceeding is triggered or a "stay" is granted (under art. 6 of
Commission proposal)72
, the AECE enforcement is suspended. A 'stay of individual
enforcement actions' means a temporary suspension of the right to enforce a claim by a
creditor against a debtor, ordered by a judicial or administrative authority73
.
This option will not affect the national rules and principles of pre-insolvency and insolvency
proceedings, which in case of conflict would prevail to the extent granted by national law.
Therefore, an AECE would not prevent those provisions from having their desired effects,
thereby maintaining the balance of debtors and creditors' interests and the order of priority of
different creditors. The AECE would remain consistent also with the EU rules on jurisdiction
and applicable law in insolvency proceedings (i.e. the Insolvency Regulation)74
. The
introduction of the AECE in the national framework would leave MS' national insolvency law
unaffected75
. In particular, because, as said, the AECE is not a new security right, this option
would be without impact on MS’ existing ranking of creditors' rules and principles (e.g. par
conditio creditorum and pari passu principles).
Legal instrument – The legal instrument envisaged in option 2 would be a minimum
harmonisation Directive which would provide key features of national extrajudicial
enforcement procedures, while granting sufficient discretion and flexibility to Member States
as regards the way the new requirements would be implemented into national laws.
71
http://ec.europa.eu/information_society/newsroom/image/document/2016-48/proposal_40046.pdf
72
Under Art 6 , COM (2016) 723 "debtors (…) may benefit from a stay of individual enforcement actions if and
to the extent such a stay is necessary to support the negotiations of a restructuring plan".
73
Art 1, COM (2016) 723
74
http://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32015R0848
75
See among others: Security Rights and the European Insolvency Regulation - JUST/2013 -
http://3x6woj16vh2x3wjgt851bs9f.wpengine.netdna-cdn.com/files/2014/07/SREIR-Roman-Legal-Systems.pdf
39
9.2.4 Option 3 - Creation of a new EU security right together with a fully
harmonised extrajudicial enforcement procedure
This option would consist in establishing a new EU security right which would be added to
the already existing security rights available in Member States. This option, labelled ALS
(Accelerated Loan Security) would provide for the creation of a new EU security right which
would be enforced through a fully harmonised extra-judicial enforcement procedure. If such
security was granted to the bank by the borrower, this security would serve as the basis for a
swift enforcement of the security right in the event of debtor's default. The ALS would be
uniformely available in the EU and would require a high level of harmonisation of Members
States' key legal provisions such as civil, commercial, restructuring, and insolvency laws, and
public law (most of which are left to national discretion/rules in option 1 and option 2).
The EU common provisions of the ALS would focus on five areas:
1) Nature – The ALS would be a new EU security right to be added to the types of security
rights existing at national level. The ALS would also include a specific (i.e. repossession) out-
of-court enforcement procedure. The ALS would be voluntarily agreed in writing. Even if the
use of the ALS is agreed by the contractual parties, it would not be mandatory for the bank to
use the fast enforcement mechanism of ALS where the borrower is in default. It will be up to
the bank to assess whether or not it wishes to use this instrument.
2) Procedural features – The ALS would be enforced out-of-court through appropriation.
Out-of-court enforcement by means of appropriation which consists in the reposession of the
assets would work as follows: once the debtor is in default in fullfilling its obligations as set
up in the loan agreement, the ownership of the movable or immovable assets, given as a
guarantee by the debtor, to the bank would be the transferred to the bank/other creditor where
the original loan has been transferred by a bank to a third pary. Having acquired the
ownership over the encumbered assets, the bank could therefore be in the position to foreclose
the collateral (i.e. to execute directly the security right) via an out-of-court proceeding,
without any judicial intervention. Concretly, in such a case the bank would have the right to
directly recover value from the collateral either by selling the assets (as a common private
party-seller) or by keeping them.
A key consideration in the case of appropriation is asset valuation. Valuation is important for
two main reasons: the value of the asset, as establihed following the valuation would impact
how much the creditor would recover of its outstanding claim againt the borrower, but also
whether or not the borrower should be paid back the difference between the amount recovered
and the claim.
In order to ensure that the creditor will not take undue advantage from the repossession, the
ALS foresees a valuation procedure by the appointment of a third-party independent expert. It
is key that the valuation process be carried out independently by an expert and it be done in a
way to ensure a transparent and fair process. The parties would have to agree on the
appointment of an independent expert to evaluate the collateral. This option would provide for
a set principles and rules which would govern the valuation of collateral for the purpose of its
enforcement. This should mitigate the tension between possible diverging interests between
40
the creditor and the borrower. It would be required, for example, that the valuation of the asset
be independent meaning that, in principle, it would not be possible that the valuation is carried
out by one of the contractual parties (i.e. the creditor); and that the valuation be fair and
realistic.
The valuation requirement would be set out in the security right or in the loan contract. In
both cases, the (minimum) value of the assets should be established ex ante (before the
repossession of the collateral) and following common criteria. Whenever the valuation or the
liquidation of the assets leads to a value higher than the debt amount, the secured creditor
should pay back the difference to the borrower.
Similarly to Option 2, the debtor should be able to contest and raise objections to the use of
the ALS and the valuation of the asset used as collateral for the purpose of the appropriation.
This would mean that the debtor may contest the execution procedure and to appeal to a
judicial court in relation to the use of the ALS, including as regards the valuation of the asset.
Member States would be given discretion to decide on the suspensive effects of such
objections or appeals on the enforcement of the ALS. Finding the right balance between the
power of the judicial court and such extrajudicial enforcement should be left to Member
States.
As regards a situation where, as a consequence of the appropriation of asset (regardless of
whether the creditor decides to sell or keep the encumbered assets), the creditor recovers more
value than the outstanding debt of the borrower, the creditor should have the obligation to pay
back to the debtor the difference between the value of the asset (as per the estimated value in
case of appropriation) and the amount owed as at the time of execution of the ALS. In case of
negative difference the possibility of datio in solutum / debtor's discharge (i.e. debtor not
liable for the shortage) should be addressed at national level, together with any other solution
consistent with Member States legal framework.
Given that this option introduces a new security right in Member States' legal frameworks, it
may be necessary to adapt some national rules such as civil, commercial, restructuring,
insolvency laws, and public law. For example, the creation of an ALS would have an impact
on the hierarchy/ranking of creditors in ordinary enforcement proceedings. Those rules would
need to be changed in order to take into account the establishment of the ALS in particular
with regards to the place the ALS would get in the ranking of creditors. This has an impact,
for instance, in a case where more than one security right has been granted over the same
asset(s), because it would change the order of satisfaction of concurring creditors. Such rules
have been traditionally governed by Member States' laws.
3) Publicity requirements – Given the importance of transparency to make third parties
aware that an asset is charged by a ALS, in particular in the case of real estate, when the use
of an ALS is foreseen by agreement between a bank and a corporate borrower, third parties
should be informed about the right of creditor/bank to enforce the loan by means of an out-of-
court enforcement.
In order for the banks to take full advantage of the creation of a new security right and be able
to enforce it on a cross-border basis, the establishment of an ALS under this option would be
41
accompanied by the creation of a centralised EU register. Such an EU register, which would
be an electronic one, would collect all information about the loan agreements equipped with
the ALS. This should ensure full transparency on the entities which would be able to
potentially use of the out-of-court enforcement procedure for the ALS.
4) Transferability – This feature would ask Member States to ensure that the security right
itself as well as the right to extrajudicial collateral enforcement, are transferable, in order to
foster the development of secondary markets for NPLs. In particular, where a loan equipped
with ALS is sold by the bank to a third party, that third party (which may or may not be a
credit institution) would be able to use ALS in case of borrower's default (under the same
conditions as the originating bank).
5) Restructuring and insolvency – As for AECE, the ALS will remain consistent with and
complementary to the Commission proposal on preventive restructuring and second chance.
Once a restructuring proceeding starts and the "stay" provision is granted (under art. 6 of
COM proposal or a similar national law provision), Member States will be required to ensure
that the enforcement mechanism of the ALS is suspended. The ALS will in principle not
interfere or have minimal impact on national rules and principles of pre-insolvency and
insolvency proceedings, which in case of conflict would prevail to the extent granted by
national law. However given the fact that the ALS is a new security right it would have an
impact on the ranking of creditors in insolvency law.
The legal instrument – The legal instrument envisaged in option 3 would be a Regulation
which will ensure that a new EU security right with full harmonisation of the extrajudicial
enforcement mechanism attached to it for secured loans would be available to all banks (and
investors in case of loan disposal) operating in the EU.
9.3 Options discarded at an early stage
9.3.1 Option 4 - EU out-of-court enforcement mechanisms through an alternative
regime
Under this option, a legislative instrument (a Regulation) would establish a uniform
extrajudicial procedure for collateral/collateral enforcement through a set of common rules,
thereby establishing a 29th
regime in the European Union with identical features in all MS to
work along already existing national procedures. That is to say that this EU-level regime
would co-exist with and complement national procedures (which would not be modified as
envisaged in the three options above). This option would ensure a level playing field for
banks and would benefit cross-border collateral enforcement cases as there would be a unique
set of rules available across the EU. Two sub-options could be imagined as follows:
[AECE-type 29th
regime] – Upon agreement between banks and corporates or entrepreneurs,
the parties could use an EU out-of-court collateral enforcement regime as a possible
alternative to their existing national mechanisms for out-of-court enforcement, if any, or as an
instrument to provide their existing security rights with this effective enforcement proceeding
(as per option 2 - AECE-type). For certain national security rights (e.g. rights in rem such as
pledges and mortgages) that are in the scope of the EU regime, there could be a potential
concurrence of national and EU extrajudicial procedures. This option is therefore discarded as
42
it would create legal uncertainties for market players in those Member States as regards to
which out-of-court mechanisms (the EU or national ones) would prevail in case of conflicts.
This additional complexity might be counterproductive in particular in those Member States
which have national extrajudicial enforcement procedures that work well.
[ALS-type 29th
regime] – Upon agreement between banks and corporates or entrepreneurs, the
parties could use the EU new security right equipped with a fully harmonised extrajudicial
enforcement procedure regime as a possible alternative to their existing national security
rights (as per option 3 – ALS-type). This option is therefore discarded as it is reasonable to
expect that well-functioning markets will have no incentive to choose a 29th
regime instead of
their functioning one. Moreover, such a Regulation would have a substantial impact on
private and/or public law (including property law and insolvency law – ranking of creditors,
registration, publicity). Since Member States would be given flexibility on how they integrate
the ALS into their legal framework, i.e. by allowing them to decide on the ranking of ALS in
the creditor hierarchy, this option might lead to divergent approaches in the Member States.
Therefore, to provide a 29th
regime requires the harmonisation of all such legal frameworks
which goes far beyond the policy objective of this initiative.
9.3.2 Option 5 - Harmonisation of judicial collateral enforcement procedures
The strengthening of the secured creditors' ability to enforce collateral might also be achieved
by ensuring that all Member States have common, effective, and transparent and legally
certain judicial enforcement procedures. This would strengthen the efficiency of the collateral
judicial enforcement across EU and to a large degree dispel with the need for any alternative
out-of-court mechanism. However, this option should be discarded as harmonising judicial
enforcement regimes would be much more invasive than any of the other options analysed
above. It would touch upon, inter alia, civil procedure and constitutional law issues which it
would not be desirable, nor feasible, to harmonise. In addition, harmonisation of the
enforcement law on the books would not necessarily go all the way towards more efficient
enforcement regimes since judicial capacity is part of the equation. Out-of-court enforcement
is a mechanism available already in a certain number of Member States to address the
problem that judicial enforcement can be lengthy for a variety of reasons. Given that this less
invasive solution is available, harmonising the entire system of enforcement law would be
disproportionate to tackle a specific problem, such as quicker value recovery from collateral
as outlined in this IA. This option would go far beyond the policy objective of this initiative.
10 What are the impacts of the policy options?
10.1 Option 1 - Non-regulatory action based on existing international harmonisation
initiatives of extrajudicial collateral enforcement procedures
10.1.1 Pros and cons
Table 2 – Pros and cons – Option 1
43
Pros Cons
Minimise implementation cost as a non-
binding instrument would leave the highest
degree of discretion to Member States
avoiding possible disruptions of national
regimes that work well.
Highest risk that some Member States do not
follow the initiative.
Potential to decrease administrative costs for
public authorities, the intervention of any
public authority in the enforcement process,
such as notary or bailiff, would be at the
expense of the parties.
Potential heterogeneity of approaches which
could continue to inhibit cross-border
collateral enforcement and lending, and
would continue exposing banks to a higher
risk of accumulation of NPLs
More details can be found in annex 6.
10.1.2 Impact on key stakeholders
The impacts on key stakeholders are assessed against the baseline scenario. Some of the
identified types of impacts below are common to the three options with, however, a varying
degree of effects on stakeholders. With regards to option 1 the expected impacts are foreseen
to be quite marginal given the uncertainties linked to how many Member States would follow
the recommendation and the approach they would take to implement the recommendations.
National measures aimed at enabling banks to recover value from secured loans through
extrajudicial enforcement, and thus aimed at preserving financial stability would not be as
effective as EU rules in ensuring financial stability at EU level, given the likelihood of
Member States focusing on domestic issues to the expense of consistency between various
national regimes. On the contrary, national measures might distort competition and affect
capital flows by establishing divergent rules.
Table 3 – Positive and negative impacts, stakeholder type – Option 1
Impact on
key
stakeholder
s
Corporate
(including
SME) as
borrowers
Secured
creditors
including
investors
Other
commercial
creditors
(unsecured,
junior,
suppliers, etc..)
Member states
(competent
authorities and
public creditors)
Positive
≈ /+ (reduced
borrowing
costs and
increased
supply of
finance but
only
marginally)
≈ /+ (increased
recovery rates
and avoidance of
NPL
accumulation but
only marginally)
≈ /+ (reduced
bid/ask spreads
for third party
≈ (the
maximisation of
value recovery by
secured creditors
should benefit
other creditors in
insolvency but
only in certain
cases)
≈ /+ (higher
banking stability,
better economic
sentiment and
freeing up of
courts capacity)
44
investors but only
marginally)
Negative
≈ /-
(unsustainable
companies
will cease
operations
quicker)
≈ /- (increased
reputational
risk)
≈ /- (suppliers of
unsustainable
companies will
lose their client
quicker)
≈ /-
(implementation
costs)
Notes: ++ = strongly positive; + = positive; -- = strongly negative; ≈ = neutral/marginal;? =
uncertain; n.a. = not applicable;
Please refer to annex 6 for a more detailed description of the impacts (both qualitatively and
quantitatively). Also section 8.1 provides a summary of the key quantifications.
10.1.3 Stakeholders' views
The group of legal experts did not include the recommendation among the options which
should be used to establish a coherent system for the out-of-court collateral enforcement. A
minimum harmonisation directive or a regulation has been the envisaged option for the expert
group (see sections 6.2.3 and 6.3.3). Preliminary views expressed by some business
associations included some support for a recommendation which would allow for a targeted
approach to incentivise Member States without out-of-court enforcement procedures to
establish such procedures. Some Member States also invited the Commission to consider a
recommendation as a way to promote best practices among Member States with existing
mechanisms and to invite Member States without such mechanisms to remedy the situation.
This would avoid any disruptions in the Member States that have such systems. None of the
categories of stakeholders who responded to the public consultation suggested the use of a
recommendation. The overall stakeholder's support for option 1 is then assessed as
low/medium. More could be found also in section 7.
10.2 Option 2 - Minimum harmonisation of extrajudicial collateral enforcement
procedures
10.2.1 Pros and cons
Table 4 – Pros and cons – Option 2
Pros Cons
A common set of key principles and rules
would contribute to ensuring a level-playing
field for banks across the EU providing more
legal certainty in a cross-border context while
Implementation of the rules in divergent
ways, given the discretion which is left to
them on a number of areas76
. The level of
divergence is however lower compared to
76
As explained in section 9.2.3
45
minimising the impact on Member States'
private and public laws.
option 1
Provide flexibility to Member States as
regards the implementation into national
frameworks while establishing a common set
of rules reducing the implementation costs
required by the directive. The great variety of
features of Member States' private and public
laws require a certain level of flexibility for
Member States to implement an EU
framework on out-of-court enforcement to
enable them to apply it in a suitable fashion.
This option would not create the highest level
of effectiveness and legal certainty as regards
out-of-court collateral enforcement
procedures (as opposed to option 3 which
would consist in full harmonisation).
Potential decrease of administrative costs for
public authorities, as the intervention of any
public authority in the enforcement process,
such as notary or bailiff, would be at the
expense of the parties
More details can be found in annex 6.
10.2.2 Impact on key stakeholders
The impacts on key stakeholders are assessed against the baseline scenario. Some of the
identified types of impacts below are common to the three options with however varying
degree of effects on the stakeholders. With regards to option 2 the impacts are expected to be
somewhat significant given the obligation for Member States to implement AECE and the
level of achieved harmonization across the EU.
Table 5 – Positive and negative impacts, stakeholder type – Option 2
Impact
on key
stakehol
ders
Corporate
(including SME)
as borrowers
Secured
creditors
including
investors
Other
commercial
creditors
(unsecured,
junior,
suppliers, etc..)
Member states
(competent
authorities and
public creditors)
Positive
+/++ (reduced
borrowing costs
and increased
supply of finance
including cross-
border)
+/++ (increased
recovery rates
and avoidance of
NPL
accumulation and
more cross-
border
opportunities)
+/++ (reduced
bid/ask spreads
for third party
investors)
≈ (the
maximisation of
value recovery by
secured creditors
should benefit
other creditors in
insolvency but
only in certain
cases)
+/++ (higher
banking stability,
better economic
sentiment and
freeing up of
courts capacity)
46
Negative
- (unsustainable
companies will
cease operations
quicker)
- (increased
reputational
risk)
- (suppliers of
unsustainable
companies will
lose their client
quicker)
≈ /-
(implementation
costs)
Please refer to annex 6 for a more detailed description of the impacts (both qualitatively and
quantitatively). Also section 8.1 provides a summary of the key quantifications.
10.2.3 Stakeholders' views
Table 6 – Shareholders' views – Option 2
Stakeholders Vie
w
Reason
Banking
industry
+ The banking industry is rather supportive of the establishment of an
out-of-court enforcement procedure across the EU. They however
expressed concerns as to: (i) the suspension of the mechanism
during restructurings and insolvency proceedings arguing that this
limitation would weaken the value of security and would
discourage banks from supporting restructuring efforts for a
debtor's potentially viable business; and (ii) a rule which would
allow full discharge of the borrower77
. Some respondents
underlined that the threat of a possible collateral enforcement can in
itself be persuasive and reduce moral hazard of debtor. In general
banks do no automatically wish to enforce the collateral and they
wish to keep the freedom of choosing to enforce the collateral or
not (which will be assured by the voluntary nature of the
mechanism).
Investors and
loan servicing
companies
+ They stressed the importance of allowing for a transfer of this
mechanism to investors to help the development of secondary
markets for NPLs. They expressed doubts as to the full
effectiveness of this mechanism if it is switched off during
insolvency and to the full discharge of the debtor which – it is
argued – might discourage banks as the risk of a reduction in price
of the collateral would be borne by the bank while an increase
would only benefit the debtor.
77
Banks argued that this could encourage borrowers to act irresponsibly and increase speculative behaviours
especially when the recovered value from the sale of assets is lower than the value of the outstanding amount.
47
Government
and public
authorities
+/- Some Member States expressed doubts that such an instrument can
significantly accelerate the enforcement process in those Member
States where procedures carried out by courts are already handled
in a short period of time. One Member State argued that while out-
of-court procedures can be beneficial, the solution to the NPL
problem lies mainly on strengthening the judicial procedure across
the EU.
Two out of the four Member States which currently do not have
out-of-court enforcement procedures for collateral (DK and MT)
support the objectives of the Commission to introduce such
mechanisms for loans granted to companies and entrepreneurs (with
the exclusion of consumers and the primary residence of a
corporate owner), but insist that out-of-court enforcement
procedures should not interfere with the Commission's proposal on
preventive restructuring and second chance, and with Member
States' insolvency laws.
Law firms + These entities see merit in EU action to establish a common
enforcement procedure because this would provide banks with
certainty in respect of process and timing to enforce security.
Consumer
associations,
NGOs, and
private
individuals
No view provided
Business
associations
+ No formal official position, the representatives agreed in their
personal capacity. The main benefit mentioned was a reduction in
risks and hence a decrease in lending rates in (particular SMEs)
arguing that the benefit will be higher in MS without or inefficient
out-of-court mechanism especially in those MS with current high
level of NPLs. The need for safeguards for debtors would inevitably
be priced in by the lenders.
The expert
group
++ Sees merit and is supportive of an EU directive on harmonized rules
on out-of-court collateral enforcement. The expert group insisted on
the need for a swift and transparent procedure, given that existing
mechanisms are often not used in practice because they do not
ensure an expedited process to allow for value recovery (i.e.
process leading to selling assets much below market value, which is
neither satisfactory for banks, nor for the borrowers).
The overall stakeholder's support for option 2 is assessed as medium. More could be found
also in section 8 and in Annex 6.
48
10.3 Option 3 - Creation of a new security right together with a fully harmonised
extrajudicial enforcement procedure
10.3.1 Pros and cons
Table 7 – Pros and cons – Option 3
Pros Cons
Banks in all Member States would benefit in
a uniform way from the possibility to recover
value from secured loans, should they choose
the ALS. This would increase legal certainty
and predictability. From a single market
perspective, banks would no longer have to
invest time and bear costs related to assessing
the way in which they can recover value on a
cross-border basis.
Major impact on Member States' legal
frameworks due to integration of a new
security right. This requires adjustment and
alignment of numerous areas of their national
legal systems (e.g. property law, private and
public law, registration rules, insolvency laws
etc.).
Easier out-of-court enforcement in case of
ALS given the legal certainty it offers as
regards the ownership of the collateral at the
moment of borrowers' default. Because the
creditor is the owner from the signing of the
loan agreement, the creditor can take actions
to take swiftly the possession of the
collateral.
The hierarchy of creditors in pre-insolvency
and insolvency procedures would need to be
altered in some Member States which is
highly politically sensitive.
Member States would need to ensure that
current formalities and publicity requirements
for existing security rights are modified to
take into account the establishment of an EU
register for the publication of ALS
Potential significant compliance costs,
especially as regards the implementation of a
new security right, the relevant
formalities/publicity requirements, training of
the legal professions in relation to the
application of a new security right, and for
the implementation of a fully harmonised
extrajudicial enforcement procedure.
More details could be found in Annex 6.
10.3.2 Impact on key stakeholders
The impacts on key stakeholders are assessed against the baseline scenario. Some of the
identified types of impacts below are common to the three options with however varying
degree of effects on the stakeholders. With regards to option 3 the impacts are expected to be
49
significant given the obligation for Member States to implement ALS and the high level of
achieved harmonization across the EU.
Table 8 – Positive and negative impacts, stakeholder type – Option 3
Impact
on key
stakehol
ders
Corporate
(including SME)
as borrowers
Secured
creditors
including
investors
Other
commercial
creditors
(unsecured,
junior,
suppliers, etc..)
Member states
(competent
authorities and
public creditors)
Positive
++ (reduced
borrowing costs
and increased
supply of finance
including cross-
border)
++ (increased
recovery rates
and avoidance of
NPL
accumulation and
more cross-
border
opportunities)
++ (reduced
bid/ask spreads
for third party
investors)
≈ (the
maximisation of
value recovery by
secured creditors
should benefit
other creditors in
insolvency but
only in certain
cases)
+/++ (higher
banking stability,
better economic
sentiment and
freeing up of
courts capacity)
Negative
- (unsustainable
companies will
cease operation
quicker)
- (increased
reputational
risk)
- (the
repossession of
the assets might
entail liability
and other risks)
- (supplier of
unsustainable
companies will
lose their client
quicker)
- (change in
creditors ranking)
Please refer to annex 6 for a more detailed description of the impacts (both qualitatively and
quantitatively). Also section 8.1 provides a summary of the key quantifications.
10.3.3 Stakeholders' views
Table 9 – Stakeholders' views - Option 3
Stakeholders Vie
w
Reason
Banking
industry
+/- This group sees the potential benefits of an ALS but only if the new
security right remains enforceable in insolvency/pre-insolvency
procedures, although it is recognised that such an advantage for
secured creditors cannot be integrated into national insolvency
regimes without significant disruptions. Moreover, because of
50
inherent risks associated with possessing the assets (especially
mortgaged real estate), all respondents from the banking industry
(barring one) said that it would be preferable that banks be granted
authority to sell instead of becoming owner of the assets in the case
of an out-of-court enforcement procedure under the form of
appropriation.
Investors and
loan servicing
companies
+/- It is important that the ALS be transferrable to investors. Otherwise
this would create an obstacle for the development of secondary
markets for NPLs. In general the views of investors and loan
servicing companies are aligned with those of banks on the need to
provide the banks the power of attorney for the sale of asset instead
of transferring the property.
Government
and public
authorities
-- Government and public authorities not supportive as they stated that
the creation of an independent European security instrument in
addition to the existing security interests under national law could
be seen as a sensible approach only if it could be integrated into the
national legal orders (in particular property law and enforcement
law) which however differ substantially in MS according to their
respective legal traditions and economic structures. Government
and public authorities also underlined the uncertainties associated
with the acquisition and realisation of the collateral as foreseen in
the ALS especially in the case of real estate where a large number
of burdens are associated with ownership entailing expenses, costs
and risks.
Law firms +/- See the potential positive effects of ALS in avoiding accumulation
of NPLs and improving lending as lenders will be equipped with
pre-determined exit routes; however they caution that the appetite
to enforce through an ALS would be lender-specific and voluntary
hence limiting somewhat the potential effects. Moreover it is
argued that the best value is rarely attained by forcing the
repossession of asset as this leaves the bank with an asset which
does not provide any productivity between repossession and sale.
Consumer
associations,
NGOs and
private
individuals
+/- Provided comments on the features of the ALS: i) compulsory
setting of a (minimum) value of the assets in advance by an
independent expert; ii) a mandatory duty to pay back the difference
to the borrower once the asset is sold iii) the mechanism trigger
should be subordinated to a request by the bank to the borrowers for
a revised business plan and possible restructuring – only in case of
a failure to comply with this request the bank should be able to
trigger the mechanism.
Business
associations
No view
51
The expert
group
-- Against creating a new security right (ALS) accompanied by an
out-of-court enforcement mechanism. According to the experts,
establishing a new security right would interfere too much with
national legal systems and would be extremely complex insofar as
very technical provisions are closely linked to national rules on
security law, transfer of ownership, publicity requirements, and
ranking of creditors in insolvency. Experts also pointed to the little
value-added of establishing a new security right because the real
problem does not rely in the absence of security rights in the
Member States, but in the lack of efficient out-of-court mechanisms
for enforcing existing security rights.
The overall stakeholder's support for option 3 is assessed as low. More could be found also in
section 8.1 and in Annex 6.
52
11 How do the options compare?
The following policy option matrix (Table 10) summarises each of the available options
(including the baseline) along with the related policy areas to be addressed (rows the former
and columns the latter). Each cell specifies the level at which each area will be settled.
Table 10 – Key characteristics of the policy options
Optio
ns
Securit
y
rights
Out-of-court
enforcement
mechanisms
Nature and
scope
Procedural
features
Transferab
ility to
third
parties
Publicity
requiremen
ts
Baseli
ne
Nationa
l -
existing
security
rights
National -
heterogeneous
situation with
the three out-
of-court
mechanisms
(private sale,
public sale and
repossession)
not all
available in the
MS. Some MS
have only 1
procedure
(depending on
assets used as
collateral),
other have 2-3
procedures,
while 4 MS do
not have any.
National -
heterogeneo
us situation
as national
systems are
applicable
sometimes
to
consumers
as well as
business
loans and
different
types of
collateral
(moveable/i
mmovable
including
primary
residence)
National -
heterogeneou
s situation as
national
systems have
different
features
given the
interlinks
with private
and public
laws which
differ
between MS
National -
different
national
rules
National -
different
national
rules
Optio
n 1
Nationa
l -
existing
security
rights
National -
more
homogeneity
as MS
recommended
to have in
place at least
one out-of-
court
enforcement
mechanism
based on high
level principles
set at EU level
National -
more
homogeneit
y as MS
recommend
ed to
exclude
consumers
and primary
residence of
business
owners
from the
scope
National -
more
homogeneity
as MS
recommende
d to ensure
that the
procedural
features
comply with
high level
principles set
at EU level
National -
more
homogeneit
y as MS
recommend
ed to ensure
that the
extrajudicial
mechanism
would be
available to
third parties
in case of
transfer of
the loan
National -
More
homogeneit
y as MS
will be
recommend
ed to inform
other
affected
parties
about out-
of-court
enforcement
mechanism.
Optio
n 2
Nationa
l -
EU - MS
required to
EU -
exclusion of
EU - high
level
EU -
requirement
EU - MS
required to
53
existing
security
rights
have in place a
private sale
mechanism or,
alternatively,
any of the two
other out-of-
court
mechanisms
consumers
and primary
residency of
business
owners
from the
scope
principles of
fairness,
transparency
and
efficiency for
private sale
as preferred
option (and
for the other
two out-of-
court
mechanisms
as fall-back
options)
National -
specific
details of the
procedure
that the
AECE is
available to
third parties
in case of
transfer of
the loan
inform
other
affected
parties
about
AECE
National -
The
modalities
will be left
to MS
depending
on the type
of security
AECE is
attached to
Optio
n 3
EU -
creation
of a
new
security
right
EU - The
repossession
mechanism
will be the
attached to the
new security
right
EU -
exclusion of
consumers
and primary
residency of
business
owners
from the
scope
EU -
repossession
of assets
upon default
and asset
valuation
procedure via
3rd
party
independent
expert
EU -
requirement
to have the
ALS
available to
3rd
parties in
case of the
transfer of
the loan
EU - Other
affected
parties will
be informed
about the
ALS
through an
centralised
EU online
register
Table 11 below summarises the extent to which the options are effective, efficient and
coherent. Effectiveness is mapped against the objectives set out in section 8. The respective
scores are attributed on the basis of the detailed analysis in the sections (see "pros and cons"
and "impact on key stakeholders") in particular:
 Effectiveness – option 3 is the most effective in reaching the policy objectives
followed by option 2 and option 1. This is because option 3 would achieve the highest
level of harmonization (hence the highest benefits in terms of recovery rates, cheaper
and more lending, cross-border aspects, etc..) whereas on the other side the benefits
achieved by option 1 are limited given the uncertainties linked to how many Member
States would follow the recommendation and the approach they would take to
implement the recommendations. Option 2 sits in between with however expected
benefits closer to option 3 than option 1;
 Efficiency – while option 3 would bring the most in terms of harmonisation and true
uniform out-of-court enforcement procedure, this would only be achieved at major
implementation and compliance costs as regards the implementation of a new security
right, the relevant formalities/publicity requirements, training of the legal professions
in relation to the application of a new security right, and for the implementation of a
fully harmonised extrajudicial enforcement procedure; for option 1 the somewhat
54
limited benefits will be achieved at the lowest cost as this option would incur minor
implementation cost (as Member States will decide how and in what way modify their
system according to the recommendation) and no major compliance costs (as the
mechanism will be attached to existing security rights); option 2 would also have no
major compliance costs (as the mechanism will be attached to existing security rights)
but would imply higher implementation costs as (some) Member States will need to
modify somewhat their national systems to comply with the principles set by the
minimum directive;
 Coherence – while option 3 would bring the most in terms of harmonisation and a
true uniform out-of-court enforcement procedure, it would have a major impact on
Member States' legal frameworks and as such it scores the poorest; option 1 on the
other hand leaving any adjustment to the discretion of Member States has the
advantage of avoiding any possible disruption to national regimes that currently work
well - however given the substantial divergences between Member States' private and
public laws, it is highly unlikely that Member States individually would be able to
ensure the overall coherence of their legislation with other Member States' out-of-
court enforcement mechanisms (so the balance between national and EU coherence is
assessed as neutral); finally option 2 would provide for a common set of rules, while at
the same time granting some level of discretion to Member States as regards the best
way to include such a mechanism into their legal frameworks hence minimizing the
impact on Member States' private and public laws.
Table 11 – Benchmarking policy options
Objectives
Policy
option
EFFECTIVENESS
EFFICIENCY COHERENCE
Reduce
future
levels of
secured
NPLs in
banks'
balance
sheet
Facilitate
more
lending to
corporates
and at
lower
costs,
including
on a cross-
border
basis
Enable secured
creditors to
effectively and
swiftly recover
collateral value
in a
standardized
way across the
EU when
business
borrowers
default on
secured loans
Baseline
scenario
No policy
change
0 0 0 0 0
Option 1 ≈/+ ≈/+ ≈/+ +/++ ≈
Option 2
+/++ +/++ +/++ + +
Option 3 ++ ++ ++ -- --
55
Notes: ++ = strongly positive; + = positive; -- = strongly negative; ≈ = neutral/marginal;? =
uncertain; n.a. = not applicable;
In terms of stakeholders' support, while there is consensus among stakeholders of all
categories as regards the policy objectives, the level of support for the different options varies
among the different categories of stakeholders:
 Option 3 received little support across the whole stakeholders' spectrum mainly given
to the fact that establishing a new EU security right would interfere too much with
national legal systems and would be extremely complex insofar as very technical
provisions are closely linked to national rules on security law, transfer of ownership,
publicity requirements, and ranking of creditors in insolvency – the overall
stakeholders' support is then assessed as low;
 Option 2 was the one supported the most especially by the banking industry, third
party investors and some Member States which see clear benefits in the establishment
of an out-of-court enforcement procedure across the EU. Some however expressed
some reservations as regards some of the features of the mechanism (e.g. suspension
of the mechanism in restructuring/insolvency procedures) which would impact its
attractiveness and efficiency. Business associations also partially supported the option
given the expected reduction in borrowing costs especially for SMEs it would entail.
However together with some Member States they argued that the usefulness of the
system would be higher in those Member States without such a system or with an
inefficient system. Finally the expert group considered option 2 as the least intrusive
option while at the same time reaching a meaningful level of harmonisation across the
EU – the overall stakeholders' support is then assessed as medium;
 Stakeholders' support for option 1 sits between the other options as it received some
support from the business associations and some Member States as it would allow for
a targeted approach to incentivise Member States without out-of-court enforcement
procedures to establish such procedures and would avoid any disruptions in the
Member States that have with such systems – the overall stakeholders' support is then
assessed as low/medium.
Table 12 – Effectiveness/efficiency/coherence and stakeholder support of the policy options
Option Effectiveness/efficiency/coherence Stakeholders
support
Level of
ambition/challenge
1 3 Low/medium low
2 6.5 medium medium
3 2 low high
Based on the above, the retained option is option 2 (minimum harmonisation of extrajudicial
collateral enforcement procedures). It achieves the policy objectives while maximising the
benefits/cost ratio. This option also strikes the right balance between achieving coherence at
EU level and leaving sufficient flexibility to Member States to implement the new rules in a
way which minimises impact on their national private (civil, commercial), property law and
56
public laws, given the multiple interlinks between this initiative and Member States' private
and public laws (hence it is found to be the most proportional among the three options
considered). Option 2 also strikes the right balance stakeholders support and level of
ambition.
Finally, in line with the problem driver 1, this option would achieve the operational objective
of assuring that the existence of out-of-court enforcement mechanism governed by the same
principles in the whole EU.
12 The preferred option and its overall impacts
As discussed in the previous section, the comparison of options led to the selection of Option
2 as the preferred option. The following subsections assess more in detail its likely economic,
social and other impacts.
12.1 Economic impacts
The primary function of security is the reduction of the risk of losses of a credit provider with
respect to performance of a debt, i.e. debt service (repayment or interest payments) in the case
of loans and non-payment in the case of sale credit. The degree to which a secured
transactions law can perform a risk-reducing function is mainly dependent on two
determinants: the legal efficiency of the security interest provided under a national law and
the value of collateral upon enforcement. As discussed throughout this impact assessment,
improving the efficiency of out-of-court collateral mechanisms can improve both aspects
hence reducing the risk of a creditor's losses. If this is clearly a benefit from the point of view
of the creditors (e.g. higher recovery rates – for the quantification see below), it can also lead
to a number of economically beneficial effects for the debtor such as78
:
 a reduction of the interest rate (as is evidenced by the difference in interest rate
between secured and unsecured credit – for the quantification of the expected
reduction see below);
 an increase of the credit amount and a decrease of the borrower‘s equity contributions
(although the determining factor for the credit amount will be the borrower’s ability to
repay the credit from ongoing and expected future income, the security will impact the
credit amount in many ways, e.g. by allowing lower amount of equity to be provided
by the debtor and thus a larger amount of debt);
 an extension of the credit’s tenor;
 an improvement of other terms and conditions (e.g. less stringent financial cover ratios
in loan agreements such as the debt service cover ratio).
78
As also explained in "The EBRD’s Model Law on Secured Transactions and its Implications for an
UNCITRAL Model Law
on Secured Transactions" – Jan-Hendrick Rover 2010
57
Moreover, security has positive effects79
on the whole economy if the risk reduction is
achieved efficiently inter-alia through expedite extra-judicial collateral mechanisms. Firstly,
there is an investment effect in the sense that security interests support investments in an
economy because they increase the amount of credit available. Furthermore, secured
transactions lead, not only to investments, but to the right investments. They have an
allocation effect in that secured transactions support an economically efficient allocation of
credit (which is a scarce economic resource). If security interests are created, credit is
extended to creditworthy borrowers, i.e. borrowers which are able and prepared to provide
security interests in valuable assets. Security is thus an integral element of a financial system
since it distinguishes between projects which should be financed and projects which should
not.
It could be claimed that the decrease in the risk of losses of the security holder is achieved at
the expense of third persons whose risk of losses is increased. However, as explained above,
security mobilises financing and sometimes it is the only way to mobilise financing at all. In
that respect, companies (SMEs in particular) already use secured borrowing extensively to
finance their long-term projects. The introduction of AECE could help companies that
previously could not get any financing at all to get a secured loan. Also, the AECE is not
expected to result in more foreclosures but in faster foreclosures, in particular for those
businesses with an unsustainable business model and which were going to become insolvent
anyway. The AECE is a mechanism that will be attached to security rights which would have
permitted the creditor to enforce them anyhow, with the difference that the AECE will allow
the creditors to enforce in a swifter manner.
Below one can find a tentative quantification of the economic benefits both for creditors
(higher recovery rates) and business borrowers (lower borrowing costs) carried out by the
Commission services (see more details in annex 4).
Taking the tables below one by one:
 The unweighted average modelled recovery rate on secured loans could increase by up
to 10 percentage points in the preferred option (AECE) compared to the baseline80
;
 In a stylised NPL crisis scenario, the future stock of around EUR 463 bn of new
corporate secured NPLs would result in a loss/need of overall provisioning for the
banking sector of EUR117 bn;
 With the use of AECE, the recovered amounts could increase by up to EUR 8 bn i.e.
reducing the total loss by about 7%;
 The increase in recovery rates is expected to translate into a reduction of borrowing
costs for companies. A more conservative lower bound estimate for the effect of
AECE on lending rates would be an average reduction of lending rates by 10.4 bp.,
leading to annual savings for borrowers of up to EUR 562M in the medium run. The
79
Idem
80
The increase in recovery rates is due to both a higher recovery at the end of the recovery process (i.e. with the
avoidance of long judicial procedures, the depreciation of the asset will be contained and the asset can be
realised quickly at its market/fair value with the additional advantage of also avoiding the costs associated to the
judicial procedures) and on a net present value basis (as the recovered amount will be faster).
58
higher bound estimate would be respectively 18.4 bp. reduction and annual savings of
up to EUR 1000M.
Table 13 - Illustrative quantification of economic benefits
Box on the enhanced impacts: reinforcement effects between the initiatives of the NPL
package
This box assesses the possible reinforcement effects between the three initiatives of the so-
called NPL package, namely i) statutory prudential backstops for loan loss coverage; ii)
development of secondary markets for NPLs, and iii) accelerated extrajudicial collateral
enforcement mechanisms. As is the usual practice, each individual impact assessment gauges
the incremental effects of the proposed measure against a no policy change baseline. The
underlying idea of the NPL package is, however, that the effects of each initiative will be
mutually enhancing. The exact quantification of these feedback effects is a quite complex
exercise as it is subject to strong modelling uncertainty. This box hence provides a qualitative
description of the feedback channels and their relative strength.
Figure 10 - The reinforcement effects between the initiatives of the NPL package
Recovery Rates (%) Average EU
Increase against
baseline Median EU
Increase against
baseline
Baseline scenario 67.7 71.7
Option 1 69.9 2.2 72.5 0.7
Option 2 78.1 10.4 77.1 5.4
Option 3 78.7 11.0 77.8 6.1
EUR 463 bl
EUR 242 bl
EUR 221 bl
20% of all non-SME loans
80% of all SME loans
Recovered value in baseline EUR 346 bl
Estimated extra
recovery in stylized
future recession
Total (% increase from
baseline)
Increase from baseline
(EUR bl)
Of which non-SME (EUR
bl) Of which SME (EUR bl)
Option 1 0.6% 2 0.4 1.6
Option 2 2.3% 8.1 1.7 6.4
Option 3 2.6% 9 1.9 7.1
Long term annual
interest rate savings for
borrowers
Low bound scenario*
(EUR M/year)
High bound scenario**
(EUR M/year)
Low bound scenario*
(decrease rate in basis
point)
High bound scenario**
(decrease rate in basis
point)
Option 1 123 219 2.2 3.9
Option 2 562 1000 10.4 18.4
Option 3 634 1129 11 19.6
*Regression coefficient between recovery rates and lending rates of 0.01 (Commission services)
** Regression coefficient between recovery rates and lending rates of 0.0178 (AFME)
Peak of Secured Corporate NPLs in a stylized
future recession
of which SME secured NPLs
of which Non-SME secured NPLs
Assumption about the share of loans using ACE
59
Effects from Accelerated extrajudicial collateral enforcement (AECE) to other initiatives
As AECE becomes more popular and used by credit institutions, the statutory prudential
backstop measures would be less binding. Indeed, banks would tend to restructure, recover or
dispose of their NPLs earlier and at a higher rate. They would be less affected by the need to
increase provisioning as time goes by, as required by the prudential backstops measures.
Given that the AECE feature would follow the NPLs following their disposal to a third party,
this would help the development of the secondary market by increasing investor participation
and thereby its liquidity (NPL demand-side effects). In particular, shorter time of resolution
and increased recovery, as expected with AECE, would increase the bid prices. Moreover, the
harmonization achieved by AECE would foster development of pan-European NPL investors,
further improving market liquidity.
Effects from Statutory prudential backstops to other initiatives
The more costly in terms of higher provisioning it becomes for banks to keep secured
corporate NPLs on their balance sheets due to the new prudential backstop rules, the higher
the incentives for banks to restructure, recover or dispose of NPLs quicker and earlier, and
hence the higher the use of AECE directly (by triggering it) or indirectly (by disposing of the
NPL to a third party).
Holding NPLs on the balance sheet will become costly over time, providing an incentive for
banks to dispose of NPLs on the secondary markets at an early stage, when the backstops
require less minimum coverage. Once the minimum coverage level required by the backstops
60
becomes more binding, the carrying book value of NPLs will be reduced. Both of these
mechanisms would ensure more sellers participation on the secondary market (NPL supply-
side effect), thereby reducing the ask price of NPLs.
Effects from the development of secondary markets for NPLs to other initiatives
Improved investor participation and better functioning of secondary markets would reduce the
bid-ask spread and increase the volume of NPLs that are transferred to third parties. Banks
would dispose of NPLs more eagerly and at an earlier stage, therefore the provisioning
backstop would be less often binding.
With a more liquid and better functioning secondary market for NPLs where investors show
appetite for NPLs with the AECE feature, there would be additional incentives for credit
institutions to use AECE at origination of new loans. This indirect feedback effect would
become active once sellers realise that it is easier to dispose of NPLs having the AECE
feature to third party investors.
Focus on SME impact
It is generally accepted that SMEs depend on bank financing more than large companies as
the latter can finance themselves through other means, such as through capital markets. In
particular, as shown in Figure 11 below, banks provide (in a way or another) the three most
popular financing methods for SMEs. Bank overdrafts usually finance company operations
and working capital needs. Longer-horizon investments, on the other hand, are usually
financed through other means, such as leasing or loans. Bank loans are currently the third
financing source with a 30% usage among large enterprises (250+ employees). For
microenterprises (lower than 10 employees) they are the second most common financing
source, with a 15% usage.
Figure 11 – Type of funding according to firm size
Source: The Commission's SAFE. Note: Size categories are based on the number of employees (1-9: micro; 10-
49: small; 50-249: medium; 250+: large). This is expressed as the percentage of respondents that used a given
source of finance in the preceding 6 months.
When it comes to secured lending, smaller loans (which are generally associated with SMEs
lending) use collateral and guarantees more. In particular, as shown in Figure 12 below, 40%
of the loans with sizes between EUR 250 000 and EUR 1 million have credit protection in the
form of collateral and guarantees, compared to 29% for loans over EUR 1 million.
61
Figure 12 – Share of loans with collateral and guarantees in total loans and advances, by
loan size
Source: ECB MFI interest rate statistics
As explained in the impacts sections above the AECE borrowing costs for SMEs are expected
to decrease as banks with an effective, expedite way to enforce their collateral can expect both
a lower probability of default (since debtor's moral hazard is reduced) and a lower loss given
default (as the collateral value will not diminish due to lengthy court procedures). With
reduced risks, banks are likely to adjust their loan pricing downwards by virtue of competitive
mechanisms. The analysis carried out by the Commission corroborates the findings of AFME
(2016) about the likely effects of better recovery rates on loan pricing: an improvement of the
recovery rate by 10 pp. is on average associated with lower lending costs by 10 to 18 bps. The
Commission work suggests that this pricing effect is stronger for small borrowers (by about
40%). Moreover thanks to the reduction of risks explained above (especially the lower loss
given default) more projects which were not able to get financing previously would now
become financeable again. As a result, secured lending and the overall supply of finance are
expected to increase as well (these volume effects have not been quantified in this impact
assessment).
12.2 Social impacts
Safeguards to business borrowers
Given the potential negative social impact of the AECE if applied too widely, a number of
measures are envisaged to prevent such impacts, starting with the scope of the initiative, its
interaction with the proposed directive on restructuring frameworks, and specific safeguards
for borrowers. That is because the use of the out-of-court procedure would accelerate the
moment a company/entrepreneur with an unviable business model which faces some
difficulties would cease to operate, as compared to a judicial enforcement or restructuring or
an insolvency or procedure, even as compared to the most effective regimes.
In order to protect some categories of collateral givers such as consumers, the scope will be
limited to business financial transactions (i.e. loans between banks and companies and
entrepreneurs). Consumers will be excluded from its scope given the potential negative
impact on their wealth and patrimony. Even for business borrowers the main residence of the
borrower will be excluded from the scope of the AECE. As a matter of fact, a number of
62
existing out-of-court enforcement mechanisms which also include loans to consumers are not
used by banks because of reputational risk in case the enforcement of collateral would have a
major impact on the overall financial situation of consumers, and thus on households81
. There
is consensus among all categories of stakeholders that an out-of-court enforcement
mechanism should be restricted to loans to businesses and corporates, with the exclusion of
some sensitive collateral assets such as primary residence of borrower. This would be
advantageous on social equity grounds.
To ensure the right balance between extrajudicial power of enforcement given to banks and
the protection of debtors, the AECE would provide certain explicit debtor's safeguards
namely:
(i) thresholds for allowing the use of AECE, aimed at avoiding the abuse of the
instrument when the debtor's default cannot be consider as relevant;
(ii) a fair mechanism of valuation and a set of common principles aimed at
achieving the maximisation of value recovery value from the private sale of the
assets given as guarantee;
(iii) possible datio in solutum (discharge) of the debtor – when the value recovered
from the asset after the enforcement proceeding is lower than the outstanding
debt amount, the debtor could be discharged from the residual repayment
obligation;
(iv) the creditor would bear the cost of "enforcement proceeding" in a first stage;
the creditor would only be able to recover the expenses only once the assets are
sold (thus taking the risk of not being compensated in case the value of the
asset is less than the outstanding debt).
In any case, the AECE will not prejudice the parties' right to access to court in relation to
the use of the out-of-court procedure. This means that the creation of an AECE is without
prejudice to the debtor's right to contest the estimated value of the collateral or the execution
procedure.
In order to be compliant with existing Member States' principles and rules of private law,
including contract and property law, these general measures would keep a certain level of
flexibility, while at the same time ensuring that Member States share certain common
standards of debtor's protection.
More broadly, as already explained in the stakeholders impacts section, debtors and secured
creditors alike would benefit from the following advantages:
 Given that the current high reliance on judiciary enforcement systems has revealed to
be costly and slow in some Member States (clogging-up of judicial courts), AECE
would serve as an useful complement to judicial procedures by ensuring both parties
an expeditious value recovering from unpaid loans in a timely and predictable manner.
81
Based on Expert Group on ACE discussions, and stakeholder input received to the public consultation and in
bilateral meetings.
63
 The AECE would strengthen the debtor's contractual commitment at lower cost and
incentivise banks to grant lending to companies by enhancing predictability in the
execution of the loan contractual terms.
Impacts on employees
Effective out-of-court procedures for collateral enforcement will have a positive influence
upon employment and entrepreneurship because they would facilitate access to finance for
companies and entrepreneurs. As already explained in other sections, banks will be
incentivised to give more loans if they could recover more value and in a swifter manner in
case of default by the company or entrepreneur.
In certain cases, there could be a possible indirect impact on employees. This could be the
case if the collateral which is enforced through AECE is essential for continuation of
operations (e.g. main machinery or premises of the company). In such a case the overall
situation of the company or the entrepreneur could be impacted to an extent which could lead
to making it impossible for that company/entrepreneur to continue performing its activities.
This could lead to the company/entrepreneur having to lay off employees. However, in such a
case the company/entrepreneur could ask the court to grant a temporary stay and open a
preventive restructuring or insolvency proceeding. An important safeguard for the
company/entrepreneur is the right to file for the opening of a preventive restructuring
proceeding even before the creditor could trigger the AECE. The ability of a company or
entrepreneur to request the judicial court to open a restructuring or insolvency procedure at
any time will ensure that the employees of the company/entrepreneur concerned will benefit
from all the rights and protections which are available to workers under such procedures. The
retained option will not impact any of the workers' rights under the existing legislation.
In conclusion, the use of the out-of-court procedure could accelerate the moment employees
would be laid off as compared to a judicial enforcement or an insolvency procedure, even as
compared to the most effective insolvency regimes. Available preventive procedures should
provide safeguards to ensure that viable companies can find a debt resolution that would
allow for a continuation of the company.
12.3 Impacts on fundamental rights
When assessing the impact of the envisaged initiative to enhance the effectiveness of value
recovery by secured creditors, the valuation pays particular attention to fundamental rights in
order to ensure that the proposed options fully respect the rights and principles set out in the
European Union Charter of Fundamental Rights, in particular those in Article 17 (right to
property), Article 16 (freedom to conduct a business), Article 47 (2) (right to a fair trial), and
Article 7 (respect for private and a family life).
Right to property : In situations where, following the use of the AECE, the borrower may lose
the premises where its business operates, the fundamental right to property comes into
64
question. Article 17 of the European Charter of Fundamental Rights (ECFR)82
enshrines a
right to property, as being the right to peaceful enjoyment of one's property or possessions,
not to be deprived of possessions unless certain conditions are met and to have the use of
property controlled only in accordance with the general interest. The concept of property, or
“possessions”, is very broadly interpreted. It covers a range of economic interests, including
'movable or immovable property, tangible or intangible interests, the economic interests
connected with the running of a business, the right to exercise a profession, and a legal claim.
The right of the borrower to property and the right of unsecured creditors to a legal claim are
therefore both protected under this provision. The right to property is not absolute, but must
be applied on balance with other values. Interferences with the enjoyment of property can be
justified by a legitimate objective, provided that the measures are proportionate.
Several elements have been considered from the perspective of compliance with the right to
property:
 The main residence of the borrower has been excluded from the scope of the initiative;
 A set of principles will be established to ensure that the out-of-court enforcement
procedure maximises collateral value upon enforcement;
 Rules are foreseen to prevent an abusive use of AECE by secured creditors. In
practice, such measures should avoid that a secured creditor enforces real estate to
satisfy a minor claim.
Right to an effective remedy and to request the opening of a preventive restructuring or
insolvency procedure: Article 47 (2) of the ECFR enshrines the right to an effective remedy
and to fair trial for anyone engaged in a civil law dispute83
. In the AECE, several measures
have been considered from the perspective of compliance with the right to an effective
remedy and safeguards were designed to address potential concerns: (i) the principle that the
borrower and the secured creditor may initiate a judicial proceeding at any time during the use
of AECE to enable the borrower to challenge at any time the use of the AECE by the secured
creditor; and (ii) the principle is that the AECE shall be suspended once a preventive
restructuring procedure is triggered and a creditor stay is granted. This principle should ensure
that the borrower may at any time request a judicial court to open a preventive restructuring or
insolvency procedure to preserve the borrower's right to conduct a business.
12.4 Environmental and other impacts
No major environmental or other impacts are expected for this proposal.
12.5 REFIT (simplification and improved efficiency)
As this impact assessment pertains to a new initiative at the EU level, a REFIT analysis is not
applicable.
82
See also Article 1 of Protocol 1 to the European Convention on Human Rights (ECHR).
83
See also Article 13 and 6 of the ECHR.
65
It is worth mentioning in this context, however, that this initiative aims at improving the
efficiency of collateral enforcement through other means than formal courts proceedings. This
should in the medium term lead to freeing up court capacity, as many more cases will be dealt
extrajudicially, and lead to lower costs for Member States and the taxpayer.
8.6. Estimated impacts of a possible legislative initiative (option 2) on Member States'
national legal frameworks
MS
Is an out-of-
court
enforcement of
collateral
possible?
Does the system
cover immovable
property (real
estate)?
Does the system
cover movable
property
(machinery,
tools)?
How far MS will have to
reform existing schemes?
(low to high intensity
level)84
AT YES YES YES
low
BE
YES, but limited
scope
NO YES
medium
BG
YES, but limited
scope
NO YES
medium
HR
YES, but limited
scope
NO YES
medium
CY YES YES YES
low
CZ YES YES YES low
DE YES
YES, but minimum
court involvement
needed
YES
low
DK NO - - high
84
These are rough estimates. The need and extent of national reforms which would be needed
in Member States will depend on the precise features of a possible EU framework and the
features of existing mechanisms for extrajudicial enforcement. The preferred option refers to a
minimum; harmonisation directive which would build on national systems which work well.
66
EE YES
YES, but minimum
court involvement
needed
-
medium
EL NO - - high
FI
YES, but limited
scope
NO YES
medium
FR YES YES YES
low
HU
YES, but limited
scope
NO
YES but unclear
how broad the
scope is
medium
IE YES YES YES
low
IT YES YES YES
low
LV
YES, but limited
scope
NO YES
medium
LT YES YES YES low
LU
YES, but
minimum court
involvement
needed
YES, but minimum
court involvement
needed
YES, but
minimum court
involvement
needed low
MT NO - - high
NL YES YES YES
low
PL
YES, but limited
scope
NO YES
medium
PT
YES, but limited
scope
NO YES
medium
RO
YES, but limited
scope
NO YES
medium
67
SK YES YES YES
low
SI YES
YES (for loans
originated after
20lowmedium)
YES
low
ES YES YES YES
low
SE
YES, but limited
scope
NO YES
medium
UK YES YES YES
low
Tot
al
25 YES / 3 NO
15 YES /
13 NO
24 YES / 4 NO
-
13 How will actual impacts be monitored and evaluated?
The proposal is expected to follow normal implementation procedures. Ex-post evaluation of
all new legislative measures is a top priority for the Commission. The Commission shall
establish a programme for monitoring the outputs, results and impacts of this initiative one
year after the legal instrument becomes effective. The monitoring programme shall set out the
means by which the data and other necessary evidence will be collected. An evaluation is
envisaged 5 years after the implementation of the measure. The objective of the evaluation
will be to assess, among other things, how effective and efficient it has been in terms of
achieving the objectives presented in this impact assessment and to decide whether new
measures or amendments are needed.
In terms of indicators and sources that could be used during the evaluation the following
monitoring indicators:
 Number of secured loans which are enforced through out-of-court procedures;
 Timeframes and value of recovery rates in case of secured lending;
 Evolution of secured NPLs to business;
 Evolution of lending to corporates and decrease of cost of lending including cross-
border.
The 2016 Commission proposal on preventive restructuring and second chance85
includes an
obligation for Member States to provide annual statistical data on inter alia: (i) the number of
85
SWD(2016) 357 final – Commission Impact Assessment
68
preventive restructuring procedures opened by enterprises in difficulty, (iii) the average length
of proceedings, including particular procedural phases (e.g. before courts, out-of-court), and
(iii) recovery rates in different types of procedures.
Given the limited availability of data on out-of-court mechanisms, national competent
authorities which supervise banks would be required to collect information on the number of
secured loans which are enforced through the AECE and the timeframes for such
enforcement. The proposal will asks Member States to provide annual statistical data on these
matters one year after the legal instrument becomes effective. While the Commission will be
in charge of monitoring the implementation of the directive according to EU law, the other
indicators will be collected through the help of national competent authorities.
69
Annex 1 – Procedural information
I. Lead DG, DeCIDE planning /CWP references
This Impact Assessment Report was prepared by Directorate C "Financial markets" of the
Directorate-General for Financial Stability, Financial Services and Capital Markets Union"
(DG FISMA).
The Decide Planning reference of the "Accelerated Loan security - Protection of secured
creditors from business borrowers' default" is PLAN/2017/1406, published 7 July 2017.
Strengthening the position of secured creditors is part of the broader strategy of the
Commission to deal with NPLs. This possible legislative initiative has been announced in the
Mid-term review of the CMU Action Plan (8.06.2017)86
and in the Commission
Communication on the Banking Union (11.10.207)87
.
II. Organisation and timing
Several services of the Commission with an interest in the assessment of the initiative have
been associated in the development of this analysis.
Three Inter-Service Steering Group (ISSG) meetings, consisting of representatives from
various Directorates-General of the Commission, were held in 2017.
The first meeting took place in September 2017 has been attended by DG ECFIN, GROW,
JUST, TRADE and the Secretariat General (SG).
The second meeting was held on 2 October 2017. Representatives from DG ECFIN, JUST,
GROW and the Secretariat General (SG) were present.
The third meeting was held on 4 December 2017 2017 has been attended by DG ECFIN, and
the Secretariat General (SG). This was the last meeting of the ISSG before the submission to
the Regulatory Scrutiny Board on 6 December 2017. DG FISMA has had several bilateral
exchanges with DG JUST in anticipation of the 4 December meeting in order to ensure that
the impact assessment takes into account DG JUST's observations.
The meetings were chaired by SG.
DG FISMA has updated the Impact Assessment by taking into account the comments made
by SG, ECFIN, JUST and GROW. In particular, the following changes were made:
 DG FISMA has integrated in the impact assessment the comments received from DG
JUST as regards the ways by which it would be ensured that an initiative on out-of-
court enforcement of collateral would be fully consistent and complementary to the
2016 Commission proposal on preventative restructuring frameworks.
86
CMU MTR Communication - https://ec.europa.eu/info/sites/info/files/communication-cmu-mid-term-review-
june2017_en.pdf
87
Banking Union Communication - http://ec.europa.eu/finance/docs/law/171011-communication-banking-
union_en.pdf
70
 DG FISMA has addressed the comments made by SG and DG ECFIN concerning the
interaction between this initiative and the other Commission work strands which aim
to address the NPL problem. Such comments have been addressed in the introductory
section and the section on the impacts of this initiative- on a stand-alone basis and as
part of the broader NPL package.
 DG FISMA has integrated in the impact assessment the comments received from DG
JUST as regards consumer protection aspects, to ensure that consumers are excluded
from the scope of this initiative.
 DG FISMA has addressed the comments made by DG GROW as regards the need to
present the possible impact of a framework on out-of-court collateral enforcement on
SMEs by indicating, in respect to the three options analyses, the estimated impact on
SMEs.
III. Exceptions to the better regulation guidelines
No exception from the Better Regulation Guidelines has been identified by DG FISMA.
IV. Consultation of the Regulatory Scrutiny Board (RSB)
The Impact Assessment report was examined by the Regulatory Scrutiny Board on
10 January, 2018. The Board gave a positive opinion.
V. Evidence, sources and quality
The impact assessment has been carried out with the comprehensive qualitative and
quantitative evidence from:
 Mapping of existing legal framework of Member States on out-of-court collateral
enforcement. This has been carried out on the basis of the responses sent by the
Ministries of Justice of Member States to a questionnaire sent by the Commission
services on 22 September 2017. 13 Member States (AT, BE, CZ, DE, DK, ES, FI, FR,
IT, LV, PL, SK, UK) have responded to the questionnaire. The mapping has also been
informed by the input provided by some experts, member of the DG JUST expert
group;
 Public consultation carried out by the Commission between July and October 2017;
 Other sources used: Uncitral, EBRD, SSM report, FCS NPL taskforce report, K&L
Gates LLP European Insolvency and Enforcement Country Guide, Linklaters studies,
Deloitte Legal study, and other studies and papers referred to in the Section on
"References".
71
Annex 2 – Stakeholder consultation
LIST OF MOST IMPORTANT CONSULTATIONS
The Commission has consulted stakeholders in many different ways. A list of the most
important consultations is provided below:
 Public consultation (July- October 2017): 60 contributions received
 Dedicated meeting with Member States:
(i) meeting with MS representatives of Ministry of Finance at the Council Financial
Services Committee (FSC – task force of NPLs) (24 May 2017- and 6 December);
(ii) Meeting with MS representatives of Ministries of Finance and Justice (20
November 2017)
 Legal expert group meetings (on 19 September 2017 and 25 October 2017,), i.e. DG
JUST expert group on restructuring and insolvency law that was created end-
November 201588
.
 Bilateral Meeting with stakeholders (on-going) - i.e. bank associations, industry,
SME representatives etc.
 Banking expert group meeting on 14 December
Public consultation
The public consultation asked for feedback on the creation of a new security right labelled
"accelerated loan security" (ALS). The answers provided can be structured around the
following main themes:
 benefits and risks of out-of-court enforcement mechanisms currently existing
 Benefits, risks and possible features and scope of ALS
 Consistency of ALS with national legal frameworks (preventive restructuring
framework and the insolvency law, public and private law rules and principles and
collateral legal framework)
The stakeholders can be clustered in the following groups:
 banking industry
 investors and loan servicing companies
 government and public authorities
 law firms
 consumer associations, NGOs and private individuals
88
Detailed list of experts could be found on the Register of Commission expert groups
(http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&groupID=3362)
72
The summary and analysis of the responses will then be grouped around the three main
themes and the five stakeholders groups identified above.
Existence of out-of-court enforcement mechanisms in MS, their benefits and risks
Banking industry
The banking industry sees the following main benefits/risks for out-of-court enforcement
mechanisms:
 Out-of-court enforcement mechanisms (where they exist) are not similar across
jurisdictions. In general, these provisions are more time efficient and less costly,
however, in some jurisdictions, the debtor has means to defend himself, including via
court protection. The challenges vary between jurisdictions, for example, the need for
cooperation of the debtor (which is problematic), to frequent amendments to the law,
valuation issues, etc.
 Court auctions normally result in heavy discounts from market level and the avoidance
of the court involvement in the disposal of the collateral ensures that the bank finds the
appropriate market place for a given collateral increasing the chances of recoveries at
market value. This helps to avoid the accumulation of non-performing loans through
better recoveries in shorter periods of time (especially in jurisdictions with suboptimal
in-court enforcement procedures)
 Less risk and easier access to quick enforcement for lenders should lead to lower
interest rates and better terms overall for borrowers
 The threat of a possible collateral enforcement can in itself be persuasive. Therefore
banks do not automatically wish to enforce the collateral, they wish to keep the
freedom of choosing to enforce the collateral or not.
 The recent reform in Italy (Patto Marciano) is expected to reduce the timing vis-à-vis a
judicial enforcement proceeding or the foreclosure of the guaranteed assets although
so far the measure has not been particularly well accepted by the market given lack of
incentives for borrowers to accept the new clause in the loan agreement and the
condition for the execution (the non-payment of 9 instalments is considered a very
long period)
Investors and loan servicing companies
 The ability to rely upon out-of-court enforcement varies from relatively sophisticated
out-of-court procedures in England to court driven enforcement in a number of other
European member states. There are obvious costs and time efficiencies that are
derived from an out-of-court process which can lead to better recoveries. It is worth
noting that banks in Europe also benefit from the European Financial Collateral
Directive, which allows financial collateral arrangements to be enforced by way of
appropriation and no court involvement. The Directive has been implemented in
different ways and is dependent upon an arrangement falling within a specified
category. Generally speaking the Directive has been welcomed by lenders who have
benefitted from its application, and have as a consequence avoided the need to resort
to the courts. Of course part of its effectiveness relied upon the fact that it switches off
the debtor protections derived from insolvency laws.
 In Spain, there is a possibility to enforce mortgages out-of-court (always providing
that it was agreed in advance by lender and borrower). This type of enforcement is
much faster but could be more expensive than a judicial one. Nowadays, debtors are
entitled to as same protection as in a judicial enforcement (depending on features of
73
the specific debtor, and type of real estate), which somehow impairs the hypothetical
advantages of this form of enforcement. This enforcement is out-of-court, but requests
the intervention of a Notary Public, and debtor is always entitled to the standard legal
protection, so it is not considered that there are risks neither challenges different than
in a judicial proceeding.
 The Belgian legislator has adopted a new framework for movable asset security,
pursuant to which such out-of-court enforcement will be generally possible for all
security over movable assets. The entry into force of such framework has been
postponed a number of times and is currently foreseen for 1 January 2018. This new
feature is generally welcomed by market participants in Belgium. It is expected that
this reform will reduce unnecessary transaction/enforcement costs. In general, lenders
will be able to act more swiftly in an enforcement scenario. It should be noted,
however, that any action taken by a secured lender in these circumstances will be
subject to ex post judicial scrutiny. It is expected that enforcement provisions in
security documents will become more detailed to provide the lender with clear
guidelines for enforcement. Faster enforcement and resolution procedures will have a
positive effect on resolving NPLs and helping banks to more efficiently remove them
from their balance sheets
 Benefits could arise from both the use of the out-of-court instrument for avoiding
foreclosures and from the standardization and certainty provided by an EU action
Government and public authorities
 Out-of-court proceedings allows for relatively quickly recovery of the loan which in
turn increases the amount of recovery (in present value terms). EU framework should
deliver some added value, since it will further harmonize enforcement procedures and
set mutually recognized standards. It could contribute to deeper integration of the
financial markets and facilitation of cross-border activities
 Improving the protection of secured creditors in instrumental in resolving and
reducing non -performing loans
 Some Member States have implemented banking and civil law legislative reforms to
provide banks with contractual-based security rights which allows for an out-of-court
repossession of collaterals. These protections are currently not available to banks in all
Member States which from an economic point of view is pivotal for sound cross-
border lending. The fragmented legal framework and the inefficiency of the judicial
system between member states in the field of collateral enforcement represents
vulnerability for bank stability (through the possibility of systemic crisis) having a
negative impact on the capacity of financial institution to provide lending. Therefore, a
greater convergence in EU secured loan enforcement systems could benefit enterprises
by facilitating credit
 Out-of-court mechanisms have a positive (although somewhat limited) impact on
NPLs as they would improve marginally the quality of the collateral (as it will be less
impacted by a decrease in value due to long procedures) and its liquidity.
Law firms:
 An efficient, out-of-court enforcement process is essential for all security rights to
ensure that they are effective and facilitate resolution of debts
 In theory, realisation of collateral out-of-court by using an accelerated enforcement
device, promises a quick exit. However, even where such an option exists, lenders in
74
some jurisdictions may be reluctant to use it. One reason for this is that lenders view
court-enforcement as providing a layer of protection from liability vis-à-vis those
borrowers who claim the proceeds should have been higher. In order to avoid such
challenges, lenders are often keen to agree upon co-operative exits with borrowers.
Professional third party loan servicers may be more willing to use an out-of-court
option in jurisdictions where these concerns arise as they have less fear of reputational
damage
 Introducing an harmonized enforcement process across MS would become
increasingly familiar to non-EU investors thereby reducing the barriers to entry into
new EU jurisdiction for such investors
 Provisions about out-of-court collateral enforcement mechanisms in UK provide banks
with certainty in respect of process and timing to enforce security. Given that the
processes are very familiar, investors are able to price the underlying collateral as they
have visibility on the process and hence there is more liquidity in the market
 An efficient, out-of-court enforcement process is essential for all security rights to
ensure that they are effective and facilitate resolution of debts
Consumer associations, NGOs and private individuals
 The Commission services have not received any feedback on this from consumer
associations, NGOs and private individuals.
Benefits, risks, possible features and scope of ALS
Banking industry
The banking industry sees the following main benefits with the creation of ALS:
 ALS could lead to increased access to capital and would support the stability of the
financial sector and through an harmonized approach would also encourage further
cross-border lending
 the benefits of such instrument are considerable if it remains valid/enforceable in
insolvency / pre-insolvency processes (although it is recognized that such an
advantage for secured creditors cannot be integrated into national insolvency regimes
without significant disruptions)
 benefits can be further enhanced if loans backed by ALS were to be granted
preferential prudential treatment (lower capital requirements)
 Borrowers would be very inclined to accept this security if the costs are adjusted. An
immovable property as security might be very expensive nowadays in certain
jurisdictions (costs that are born by the debtor). Therefore, if this security entails lower
costs, it would be very much welcomed by the debtors when offered by the lenders.
 The benefits are potentially huge: no foreclosure costs, no auction value depreciation
(higher sale price), shorter liquidation timing, improvement in debtors’ discipline,
possibility (upon negotiation) of full debt discharge for the borrower in case of sale at
price lower than debt, etc. However, no bank has ever made use of this possibility in
Italy due to the high risks of consequent claims and economic loss when asset
repossessed are not sold in time / at the desired price. The main risk for litigation is the
relationship with insolvency and bankruptcy when many creditors claim rights on the
asset.
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The main risks seen by the banking industry:
 Because of inherent risks associated with the assets (especially mortgaged real estate),
it would be preferable to be granted authority to sell instead of becoming the owner of
the assets. With repossession the bank would have to consolidate newly acquired
assets on their balance sheets to the detriment of e.g. capital allocation requirements.
 private sale or an auction with proceeds going directly to the lender were mentioned as
alternative methods to satisfy the lender while keeping the assets off the balance sheet.
One specific banking association however sees no major obstacles or risks in banks
becoming the owner of the collateral (from a neither balance sheet nor operational
perspective).
 Another mentioned risk is that the entitlement to enforce is contested by the collateral
pledgor or mortgagor (the pledgor or mortgagor can for example request a court
injunction forbidding the pledgee or mortgagee to enforce on the basis that the pledgee
or mortgagee has failed to exercise reasonable forbearance). It' argued that in certain
MS one of the main obstacles to efficient enforcement of collateral are the privileged
granted to the debtor (as the weakest party) which tend to weaken negotiations for its
future possibility of opposition or revocation.
On the features and the scope:
 In general, the banking industry is against the debtor's full discharge as it could
encourage borrowers to act irresponsibly and increase speculative behaviours
especially when the recovered value from the sale of assets is lower than the value of
the outstanding loan. The increase in moral hazard might drive up the price of credit to
compensate for the risk. It is argued that the lender's position would be even worse
than without security (as long as part of the debt would be erased automatically) and
by allowing the borrower to repay the loan by transferring the ownership of the assets
to the banks would change the lending philosophy from lending based on credit risk
(i.e. credit worthiness of the debtor) to asset financing (as the risk would now depend
mainly on the value of the assets). Moreover the increase of asset/collateral would
only positively impact the debtor. However one association at the same time argued
that one positive aspect of discharging debtors is that it could facilitate cooperation
between the parties which will lead to faster NPL resolution and potentially higher
recoveries (in net present value) which in turn should reflect lower fees and interest
rates for new loans.
 General agreement on the scope i.e. excluding consumers from such a mechanism
although one association points out that Mortgage Credit Directive provides that
"Member states shall not prevent the parties to a credit agreement from expressly
agreeing that return or transfer to the creditor of the security or proceeds from the sale
of the security is sufficient to repay the credit". Another respondent, while
acknowledging the sensitive nature of dealing with retail NPL, points out to the
substantial stock in retail NPL.
 The transfer of ownership in case of default should be done in a commercial manner
(with prior valuation, with proper publicity in advance) in order to derive the best
value. With that regards, it is also argued that the value of the collateral would
necessarily have to be established after the debtor’s default as, for example, the
moment in which the asset’s ownership is transferred to the bank. This is the only way
in which risks of objection of such transfer can be limited (e.g. risks of inconsistency
between the value determined by the expert and the amounts lent, probably issued on
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the basis of values that were not consistent with the “minimum” value established at
the time of the granting of the loan).
 Instead of the transferring the property, the borrower should be obliged to grant the
bank (or any other broker, estate agent, real estate company, etc.) power of attorney
for the sale of the asset on the market at a price estimated by independent third party
expert. Only when and if the bank succeeds in selling the asset, the bank should be
obliged to return the excess of the sale proceeds or reduce the outstanding debt if sale
price was lower than debt. In this way all taxes and liabilities will be based on a real
sale price (and not on an estimated value).
 General agreement on the collateral scope i.e. excluding borrower's main residence
(with a suggestion from one respondent to exclude the main residence identified at the
time the credit was granted but not to exclude residential assets that fall within the
categories of villa, castle, luxury property and other comparable assets). Other
respondent would only exclude the primary residence for small entrepreneurs or
agricultural sector works.
 One respondent argued that ALS would not be possible without an efficient judicial
system with the need of judicial controls and the possibility for legal protection of
both the debtors and the guarantors.
Investors and loan servicing companies
 Important that the ALS would be transferable to the investors otherwise it would
create an obstacle for the secondary market
 ALS could help with the avoidance of future accumulation on NPLs especially if other
relevant changes in law makes it enforceable and practicable (e.g. the fact that all
debtors are entitled to the same legal protection both in judicial and extra-judicial
proceedings might prejudice this type of enforcement)
 As for the debtor safeguards it was pointed out that a balance is needed between a
minor breach of the loan agreement repayment in view of its total length, the trigger
events for enforcing such security shall be very well and precisely established,
including giving to the debtor second chance for compliance with the payment
schedule
 Ok on the scope (excluding consumers) recognizing the need to special protection for
the weakest party
 ALS may not get much traction because contrary to the European Financial Collateral
Directive it is not foreseen to switch off the debtor protections derived from
insolvency laws
 It should make sure that ALS is not abused or used in a manner that results in unfair
prejudice to the rights of certain market participants (e.g. permitting the holder of ALS
to enforce its security at a time when the company may be in trouble while exposing
all other creditors to clawbacks or other asset transfer restrictions at that time may not
result in the best result for the company or the creditors). However, a properly
structured ALS might be very helpful in allowing banks to resolve NPLs and remove
them from their balance sheets.
 The full discharge of the debtor may discourage banks as the risk of a reduction in the
price of the collateral is born by the bank while an increase only benefits the debtor.
 One particular investor association had views similar to those expressed by most
banking associations with regards to the scope, the need to provide the banks the
power of attorney for the sale of the asset instead of transferring the property, instead
of discharge from further repayment obligations debtors should be incentivized to use
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ALS as it is cheaper compared to the security rights in terms of tax and registration
requirements
Government and public authorities
 Doubts about the fact the instrument can significantly accelerate the general process in
those MS where the foreclosure procedures carried out by courts are already being
handled in a short period of time. The protection mechanisms for the debtor (e.g.
obtaining an up to date expert valuation of asset prices) would probably slow down the
process even further.
 Uncertainties associated with the acquisition and realization of the collateral are
difficult to avoid and will represent burdens to the realization process. In particular,
the process of realizing an ALS cannot escape judicial review of the involved matters
and hence this raises doubts as to whether problems in effectiveness and efficiency of
judicial procedures can be solved by allowing for an out-of-court enforcement of
collateral. One MS calls for rather strengthened (quick, transparent, and legally
certain) judicial procedure.
 It is doubtful that secured creditors, particularly credit institutions in Member States
with efficient enforcement and insolvency systems, have an interest in acquiring the
ownership of the collateral. Such interest could only exist if there is no other viable
possibility of utilizing the collateral because of the lack of efficient enforcement
systems. In the case of real estate, in particular, a large number of burdens are
associated with ownership which will entail expenses, costs and risks
 Generally ok with the scope (especially the exclusion made on social equity grounds)
but the tight applicable framework and possible exceptions raise doubts about whether
such an instrument would be of great relevance in practice (sometimes the privately
used property might be the only asset owned by SME that would qualify as collateral).
Also given that the regulation regarding transfer and enforcement of these two forms
of collateral differ considerably, it is suggested to have two sets of rules for real estate
and movables. However one MS questions how the limitation of the scope of
application to commercial transactions is to be ensured legally, especially as the type
of use of an encumbered estate may change in the course of time; also it raises doubts
about the restriction of the scope of application with regard to the initial residence of
the debtor and his relatives hence this is thought to entail a considerable risk of abuse
and weakens the instrument.
 The need of appropriate balance between the legitimate interests of secured creditors
in having their rights enforced without delay and the protection of the rights of debtors
e.g. need to have an fair evaluation carried out by a third party at the time of transfer
(not ex ante) in order to avoid the tension between the debtor and the creditor.
 ALS gives priority in enforcing secured loans through selling collateral and hence
secured creditors could be less willing to participate in corporate restructuring
proceedings adversely impacting the outcome of such proceedings and other creditors
chances to recover their debts.
 Transferring the main assets to the bank would result in severe disruption of the
normal business operations and deteriorates the ability of the firm to repay the
remaining part of the loan (if the outstanding amount was higher than the value of the
assets) as well as the ability to service other debts.
 Doubts about the full discharge for the debtor which calls into question the
strengthening of the position of secured creditors as any subsequent decrease in value
of the assets results in a unilateral burden to the creditor. One safeguard for debtors
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suggested is to involve a third party responsible to oversight the realisation process
and assuring that the interests of both creditors and debtors are met.
 Important to clarify the impacts of ALS also on non-secured lending.
Law firms
 The best value is rarely attained by forcing the repossession of asset. Forced
repossession leaves the bank with an asset which does not provide any productivity
between repossession and sale. This, plus the urgency of sale, leads the bank to sell the
repossessed asset below its real value. As a result, the part of the outstanding loan not
covered by the sale of the asset remains high. The result of this is, for the bank, a
higher LGD than it would have been with a more proper solution, and for the borrower
a worsening economic situation. However, in some specific cases, quick repossession
and immediate sale may ensure that the asset generates the best possible value. Only in
the very specific case where an asset is already unused and when early repossession,
with the guarantee of an early and efficient sale, is the best way to preserve its value,
and therefore the economic benefit for both parties. As such, the key feature of
repossession should concentrate on operational / economic factors. In particular,
repossession should be prohibited whenever these conditions are met : - mediation is
possible;- the asset is in use, resale is not immediately available, and the absence of
the asset would worsen the situation of the borrower with no advantage for the lender;
- the market for resale is insufficient to ensure that the repossession will be more
profitable that a more operational solution
 The new out-of-court enforcement option should be made available to all lenders
(banks and non-bank)
 The ALS would provide further optionality to banks who wish to enforce loans to
avoid accumulation of NPLs and may improve capital flows to the country as lenders
would have pre-determined exit routes. However, the appetite to enforce such an
instrument will clearly be lender-specific and therefore in itself, may not avoid the
future accumulation of NPLs.
Consumer associations, NGOs and private individuals
 Ok with limiting the scope of application (restriction to corporate and excluding
primary residency) on social equity considerations with a suggestion to possibly adopt
specific rules under which ALS can be applied for individual borrowers if the positive
effects in terms of increasing access to finance for businesses are realised in practice;
 Ranking of creditors should not be tampered with;
 With regards to the possible features for the ALS it is suggested: i) compulsory setting
of a (minimum) value of the assets in advance by an independent expert, following the
criteria that could be set out in the security right or in the loan contract and ii) there
should be a mandatory duty to pay back the difference to the borrower once the asset
is sold whenever the evaluation of the asset leads to a value higher than the debt
amount
 The mechanism trigger should be subordinated to a request by the bank to the
borrowers for a revised business plan and possible restructuring – only in case of a
failure to comply with this request the bank should be able to trigger the mechanism.
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Consistency of ALS with national legal frameworks (preventive restructuring framework
and the insolvency law, public and private law rules and principles and collateral legal
framework)
Banking sector
 The fact that the ALS would only be enforceable as long as the debtor is not in
financial distress would weaken the value of security and would discourage banks
holding such security from supporting restructuring efforts for a debtor's potentially
viable business. The ALS should be enforceable even in those occasions. However
one banking association agrees that the use of this instrument should be limited if
there is a stay but when the stay is lifted banks should be able to trigger the ALS.
Other stakeholder mentions that a stay of the enforcement shall only be granted if the
mortgaged asset is necessary for the business of the insolvency debtor.
 The ALS as a contractual right would have to be tailored to each MS in order to
accommodate existing legal frameworks of private law which are highly diversified
within the EU
 The most important element to be taken into consideration is the general principle of
the “par condicio creditorum”, represented by the “stay” of individual enforcement
actions and, consequently, the exclusive satisfaction of all the creditors with the
insolvency proceeding’s assets. Moreover, in order to benefit from the relevant
bankruptcy provisions regarding mortgages and pledges, the accelerated loan security
should be expressly equalized to the other collateral security
 Rules should be provided in terms of relationship with the other collaterals provided
by the MS laws for example the collateral at inception should not impose restrictions
on the use of other forms of collaterals that are currently available
 For one banking association, the existence of an instrument which could be enforced
rapidly appears to run counter the proposed widespread implementation in insolvency
or pre-insolvency of a “stay of execution” to enable viable but distressed companies to
find a solution to preserve value for all stakeholders. If a corporate borrower is still in
activity it should be ensured that the collateral is not enforced if the assets are vital to
the borrower's operations.
Investors and loan servicing companies
 To be consistent with local private law, the instrument shall be preferably regulated by
the Civil Code as a new security instrument to be established by an agreement
between some categories of creditors and debtors. As regards public law, an
accelerated loan security instrument concerning the immovable assets should be
registered in the Land Registry. These creditors should have the right to register this
security instrument concerning the movable assets in the notaries register
Government and public authorities
 No specific rules for insolvency should be introduced. The accelerated loan security
instrument should rather fall under existing national law regulating national
insolvency or EU law with respect to the treatment of collateral in case of insolvency
or pre-insolvency. It is important to have the possibility to suspend utilization to
provide continuation of business. Special rules for appeal or similar claims should not
be introduced.
 It is important that the preconditions for effectively grounding security rights remain
within the framework of national law (as is the case, for instance, with the registration
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in the land register for real estate). Legislation at EU-level should be limited to define
the circumstances under which an accelerated loan security instrument can be applied,
like the scope of application and the explicit approval of the security provider.
Additionally, EU legislation should determine which protective measures should apply
in case of utilization or sale.
 The subject matter of securing loans and means available to secure loans is closely
linked to various areas of the Member States' national legal systems and is based on
them, in particular on the substantive law of property and on enforcement law. These
legal areas differ in the Member States according to their respective legal traditions
and economic structures. Against this background, the creation of an independent
European security instrument in addition to the existing security interests under
national law could be seen as a sensible approach only if it could be integrated into the
national legal orders.
 ALS calls into question the effectiveness and efficiency of insolvency law and, in
particular, the feasibility of continuing and restructuring distressed companies. Both
require the option of maintaining a business as a going concern despite of the opening
of insolvency proceedings. Only then can the going concern value be fully preserved
and realized. It follows that insolvency law must impose some restrictions on the
utilization of the collateral. A free, unrestricted right to dispose, or otherwise realize
the value of the collateral is thus not compatible with the aforementioned demands. It
would inevitably result in an erosion of the company as a functioning economic entity,
preventing recovery options and precluding the realization of the company's full value
and also excluding restructuring opportunities. Although the nature of participation of
the secured creditors in insolvency proceedings may differ in the Member States, it
follows from these fundamental considerations that secured creditors’ rights to
foreclose security interests must be subject to some insolvency law restrictions, which
do not allow for an extra-judicial, unrestricted right to dispose of, or otherwise realize
the value of, the collateral.
Law firms
 To encourage the use of an accelerated enforcement device, legal systems in Member
States would need to be harmonised with a view to cross-border collateralisations and
accepting that some protection currently available to borrowers would need to be
relinquished to enable accelerated enforcement to be used (e.g. with commercial real
estate or share pledges).
Consumer associations, NGOs and private individuals
 It is of essence that the preventive restructuring framework proposed by the
Commission in November 2016 is a directive as soon as possible and implemented in
those jurisdictions which do not have such a tool also as soon as possible. It is of
essence that such proposal is implemented in the current terms in relation to the stay or
even with an automatic stay. This is the only real protection for non -beneficiaries
creditors of the "accelerated loan security" and the debtor with whom they are
negotiating. Any abuse of this protection can be sufficiently avoided with article 6,
paragraph 8 of the Directive proposal. In these circumstances article 6, paragraph 9
will not apply when a stay affects an accelerated loan security enforcement.
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Meetings with member states
Financial Services Committee meeting on 24.05.2017
The concept of an ALS was presented at that meeting. The members of the Financial Services
Committee (FSC) have been overall supportive to the main elements of an ALS, as described
in the discussion non-paper.
IT explained very well the benefits of introducing the accelerated loan security, such as:
1. Improving the quality of collateral
2. Decreasing the cost of credit
3. Making the credit less risky and so more accessible
4. Lowering the accumulation of NPLs in banks portfolio/balance-sheet
Any harmonisation of such a measure (inspired by IT patto marciano and non-possessory
pledge) would promote integration across MS helping the cross-border dimension.
ECB was very supportive and suggested also to look at the best practices already existing in
some MS.
FR, DE, PT, BE and AT having similar instruments already in place (AT and BE only for
movable asset) showed support.
FI, ES, BG, IE, LV, DK while agreeing with the general idea of the accelerated loan security,
expressed some concerns about the consistency of this instrument with their national private
law (e.g. property law, credit rules), judicial rules (enforcement proceeding) and public law
(registration rules).
In general, the main requests of clarification of MS (that expressed their views) were about:
 Out-of-court mechanism
 Interaction with pre-insolvency regime (as per COM last proposal)
 Interaction with national insolvency law (impact on ranking of creditors and
insolvency proceeding)
 General features of the accelerated loan security (scope, assets, definition of default,
avoidance actions) and "option nature" of the regime (i.e. contractual choice of the
parties).
Meeting with Member States on 20.11.2017
On 20 November, FISMA and JUST Commission services had a meeting with Member
States' Finance and Justice representatives on Accelerated Extrajudicial Collateral
Enforcement. All MS except for LV, SI and the UK were present, both Finance and Justice
departments. The ECB and the EBA were also presented.
The purpose of the meeting was to present the Commission's work on the AECE and to
exchange views with the Member States on this initiative, the interaction and possible
interference with Member States' private and public laws, including insolvency, and with the
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2016 proposal on preventive restructuring, as well as to explore the single market potential of
this work.
The Commission presented the broader context of the NPL work including the Council Action
Plan on tackling NPLs, the CMU MTR commitment and the Banking Union Communication
and indicated that a package of measures is foreseen for Q1 2018. The key features of a
potential EU framework were also presented. Member States were invited to comment on the
proposed approach.
Member States seem to be divided between those that see merit in an EU framework on the
AECE and those that expressed doubts about the value-added of a possible legislative
initiative.
 Those that were in favour would support a principle-based framework which would
leave sufficient flexibility to MS to implement the EU requirements in a way to make
them fit into national private and public laws: (ES, MT, IE, PT, and SK).
 Some Member States were against a binding EU framework on out-of-court
enforcement procedures: NL, AT, DE, FI and SE. Those MS would prefer a
recommendation arguing that such an instrument would provide for a targeted
approach depending on MS' systems.
 FR has not indicated a clear view, while expressing support for the objective of
addressing the NPL issue. FR called for further discussions in an expert group.
A positive take from the meeting is that except for PL, the other MS do not see any big risk of
interference with the 2016 Commission proposal on preventive restructuring frameworks
(given the envisaged rule that AECE will be suspended when a stay is declared in
restructuring). Very few expressed concerns about the AECE's possible negative impact on
the viability of a company in case the business would be deprived of its main assets.
However, MS seemed reassured by the envisaged principle that a company in default would
have the right to challenge the use of AECE or to ask for the opening of a preventive
restructuring procedure at any point in time.
As regards the scope of the initiative, MS agree with the exclusion of consumers and the main
residence of a corporate borrower (except for SK). However, a number of MS called for
extending the scope to other secured creditors such as suppliers, so that banks would not be
the only entities that benefit from the AECE (FR, DE, BE, CZ). Those MS do not think the
envisaged solution to allow other types of entities to benefit from AECE only when a loan
equipped with AECE is transferred to a third party (i.e. distressed fund) would be sufficient.
They would like all secured creditors to benefit from AECE from the moment they give a loan
to a business.
As regards the assets which could be used as collateral, several MS called for excluding
immovable assets (real estate): IT, DE, FI, AT, PL, BE and SE. Those MS argue that
enforcement of real estate interferes too much with civil and public laws (That despite
proposed rule to leave discretion to MS as regards the detailed implementation of EU
requirements).
Concerning the characteristic of the out-of-court enforcement procedure, many MS would like
to have flexibility to decide upon the mechanism which should be used for AECE. That is
because MS which already have out-of-court procedures have established various mechanism-
some use public sale, other private sale, or appropriation of the assets, and some others have
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two of three of these procedures available and it is up to the secured creditor to decide which
mechanism should be used.
Financial Services Committee meeting on 6 December 2017
The Commission services presented the state of play on the broader NPL package, including
on the work strand on the out-of-court collateral enforcement. The Commission services
explained that, based on exploratory work and stakeholder feedback, the best way forward
appears to be to focus only on enhancing the effectiveness of the enforcement procedure, and
not, as originally foreseen, on the establishment of a new security right together with a
harmonised enforcement procedure. That is because establishment of a new security right
would have a strong impact on national private and public laws (i.e. impact on civil, public,
insolvency laws and creditor hierarchy).
The FSC members were invite to express their views on whether a common out-of-court
framework for collateral enforcement would strengthen the ability of banks to recover value
from collateral, and thus contribute to enhancing financial stability by preventing the
accumulation of NPLs on banks' balance sheets.
ES expressed support for this work strand and indicated that a number of aspects need to be
clarified, including some very technical issues. For example, a farm which is the main
residence of a business owner should be excluded from the scope of the initiative, given the
envisaged exclusion of the primary residence of a business owner; consider registration
aspects. ES considers that the "stay" rule in the 2016 Commission proposal on preventive
restructuring is incompatible with out-of-court enforcement.
BE and ES called for extending the scope to other secured creditors than banks. FR supports
the Commission's work and would welcome further technical discussions.
Expert group meetings
First expert group meeting on 19 September 2017
At the first meeting of DG JUST Expert Group the Commission services (FISMA and JUST)
discussed with experts (judges, lawyers and academia) the policy objectives of enhancing
financial stability, the overall approach of the Commission to tackling the NPL problem, and
the work on enforcement of secured loans as a way to prevent the accumulation of NPLs on
banks' balance sheets in the future. The meeting focused on analysing the possible features of
an instrument which would ensure that all Member States make available an efficient out-of-
court enforcement of secured loans. More precisely, the following topics have been discussed:
 A tour de table to analyse ALS's structure and different-comparable legal instruments
existing at national level followed. As per the legal structure of the ALS, the main
legal issues raised by the expert were:
 Legal qualification of the ALS - two approaches are possible (i) providing an out of-
court enforcement to whatever security instruments Member States might have already
in place (ii) build a new EU security right.
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 Transfer of ownership (i.e. the "accelerated clause" under our first model) to the bank
- it was not seen as a precondition to foreclose the unpaid loans (risk of interaction
with property law, registration, third parties rights, constitutional law of some Member
States).
 Implementation - In some countries (like FR) existing out-of-court enforcement
instruments are not used (they are not attractive for banks).
 Out-of-court enforcement –the real need of an ALS-type instrument was questioned in
Member States where the judicial system works well.
 The experts also raised some economic questions linked to the structure of the ALS
such as the risk of over-protection of banks to the detriment of debtor's interests; the
value-added of the ALS as an effective instrument to tackle NPLs given the significant
changes that it would require to Member States' private and public laws; the fact that
banks might prefer to sell the unpaid loans instead of enforcing; the fact that banks do
not have an interest in becoming owners of machinery, tools etc. and have such assets
on their balance sheets or incur liability for such assets (e.g. environmental liability).
The expert group suggested constructive inputs in designing the possible EU ALS structure,
and suggested a careful assessment of the international private law dimension of the
instrument (to allow cross- border enforcements) and the consistency of the ALS with
national bankruptcy law and the recent COM proposal on restructuring and second chance
(e.g. problem of ranking).
The Chair concluded the session recalling that the ALS instrument is one of the possible
measures to solve NPLs of a more comprehensive framework that Commission services are
developing and provided preliminary explanations on the different scope of the ALS and the
Financial Collateral Directive (FCD).
The Chair stressed that the new mechanism envisaged should avoid interfering with the
Commission 2016 proposal on preventive restructuring and second chance. The intention is to
create a mechanism that would minimise impact on Member States' private and public law.
 Core features, scope, subject matter and main effect of the ALS
The discussion showed that the "accelerated clause" of the ALS (i.e. the transfer of assets'
ownership to the bank in case of debtor's default) should not be considered as a necessary
precondition to enforce the loan. It would be better to open the ALS to 3 possibilities: (i)
appropriation (ii) private sale and (iii) public sale. Different national law solutions (DE, IT,
FR. PL) were discussed. 'Appropriation' should not be understood as the transfer of ownership
rights (which would engender constitutional and practical problems), but rather of the right to
dispose of the assets (DE, UK). There should be no automatic transfer to banks.
In order to create an incentive for banks in using the ALS and to encourage a secondary
market to develop, the experts suggested not to limit the beneficiaries of the ALS clause to the
originator banks and to allow the extension of the ALS for example "to a third party
designated by the bank” (i.e. third financial institution).
The majority of the experts were in favour of shifting the ALS focus at the level of
enforcement mechanism instead of creating a new EU security right (accordingly the name of
the instrument might require some further adjustment). In this respect the problem of
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valuation of the assets and the interaction with national insolvency law were seen as critical
points.
 Formalities and third parties effects: On the registration and formalities for the
constitution of the ALS the Commission explained that it would be better not to
interfere with Member States' private or public rules. The majority of the experts
agreed that the topic should not to be addressed at EU level but not to be avoided in
substance. They therefore underlined the importance of avoiding any impact of the
ALS on third parties' rights.
 Debtor's default: The experts raised the importance of keeping a clear distinction
between the definition of "debtor's default” and the “enforcement trigger” which
should be related to payment default (and not any breach of covenant). While some
experts considered the stand-still period as an essential tool to protect the debtor's
interests, others questioned the need of the stand-still period given the judicial
safeguards already in place in Member States. In this perspective, to make the ALS
working, the enforcement trigger as well as any grace periods should be left to the ex-
ante agreement of the parties, however a judicial suspension of the out-of-court
enforcement should be possible to protect other interests (e.g. protecting the going
concern value of the debtor).
 Valuation of the assets by a third party independent expert: The expert group saw
merit in a pure contractual valuation of the assets instead of granting an evaluation
proceeding by a third independent expert. The involvement of an expert, appointed by
the Court, was seen from some experts as a possible deterrent for banks in using the
ALS. It was also specified that the need of an valuation process would ultimately
depend on the sale procedure: only in case of "appropriation" such valuation
proceeding might be meaningful in order to protect the debtor (e.g. ensure that the
asset is not sold at under-value). No matter the choice of the valuation proceeding, the
assets should be sold at market value and banks should in any case return the eventual
residual value of assets to the debtor.
 The experts were invited to provide in writing a short description of the extrajudicial
enforcement mechanisms existing at national level.
Expert group meeting on 25 October 2017
At the second meeting of DG JUST Expert Group the Commission services have informed
that based on the comments received from experts at the first meeting, the input received from
stakeholders at the public consultation and the exploratory work carried out, it seemed that a
more proportionate approach to achieve the policy objectives would be to focus on the
enforcement of collateral, not on creating a new security right. That would also ensure a more
proportionate approach and less interference with Member States' legal frameworks.
There was consensus among experts that new approach presented by Commission services
seemed a better way to address the issue of lack of effective out-of-court enforcement
procedures in Member States, and the lack of any such procedures in a few Member States.
The various possible key features of an AECE mechanism have been discussed:
 Nature and Scope of the mechanism: support for excluding consumers from the scope
given reputational risks for banks.
 Discretion of contractual parties on the use of AECE: all experts agreed.
86
 Formalities/Publicity requirements and third parties effects: experts stressed that it is
essential that third party be aware that a bank would be able to use the AECE and thus
that the AECE should be subject to publicity requirements. Experts suggested that in
order to minimise any impact on national registration rules for security rights, the
principle should be the application of publicity requirements established under each
Member State legal framework for the security right which is equipped with AECE.
That is because AECE would not be a new security right which might require new,
specific publicity, but a mechanism which follows an existing security right. This
means that Member States would not have to put in place additional transparency
requirements for the publication of AECE, other than those applicable for the
publication of the security right which is equipped with AECE.
 Triggering the accelerating clause: experts disagreed with the proposed Commission
approach that some of the conditions which need to be fulfilled so that a bank can use
AECE should be set at EU level. Given that such matters are contractual matters, the
conditions for triggering AECE should be left to the national level.
 Possible exceptions from the rule of triggering the AECE (mitigating factors): In order
to trigger the AECE mechanism the default (i.e. triggering event) should be considered
as "relevant". Experts were divided on the need and value added of some safeguards
proposed by the Commission, i.e. :
(i) maximum threshold above which should not possible to trigger the AECE and the
parties should choose an in court enforcement
(ii) allow the debtor to delay it payment if only a small part of the loan is outstanding
– having a maximum of grace period-time before the AECE would be triggered (from
1 until 3 months).
 Procedure for the Accelerated Extrajudicial Collateral Enforcement: a majority of
experts consider that private sale should be the recommended enforcement procedure.
They stressed that the Commission should establish a minimum set of features which
should ensure that private sale is a transparent process which leads to maximising the
value recovered from collateral (need for sufficient publicity before the sale;
suggestions to organise sales on line).
 Transfer of the AECE: Where a secured loan equipped with AECE is sold by the bank
to a third party, that third party (which may be a distressed fund) would be able to use
AECE in case of borrower's default (under the same conditions as the originating
bank). All experts supported this approach.
 Consistency with preventive restructuring and second chance Commission proposal:
Experts stressed that the AECE must remain consistent with and complementary to the
Commission proposal on preventive restructuring and second chance. The specific
features of a possible AECE must not affect the national rules and principles of pre-
insolvency and insolvency proceedings. Experts agreed that in case of conflict the
latter should prevail to the extent granted by national law. Therefore, an AECE would
not prevent those provisions from having their desired effects, thereby maintaining the
balance of debtors-creditors' interests and the order of priority of different creditors.
Bilateral meetings with stakeholders
The unit in charge of the file also organised and responded to requests for bilateral meetings
with key stakeholders.
87
Meeting with business organisations on 23.11.2017
Since the business organisations didn't respond to the public consultation on ALS, the unit in
charge of the file organized a meeting with three of them (BusinessEurope, UEAPME and
EuroChambre).
One came as an observer as was not interested to express views on the file (not pre-empting
the possibility to express their views on a later stage). The other two organisations didn't have
an official position as there was no consensus among their members. Below some of the
points of discussion to give an indication of views in their personal capacity (so not
representing the official position yet):
 why doing something for the whole EU and not only where it is relevant i.e. in
specific MS without or with inefficient out-of-court systems and high level of NPLs
 some of their members are concerned that in case of transferability to "aggressive"
third party investors they will be abused as usually banks in order to preserve their
business relationship with their clients and to avoid reputational risks tend to have
softer approach
 there is no need to change the system where things work well and there is no problem
in SME lending
 useful where there is problem (citing that the interest differential between an SME in
Italy and Germany is explained by 80% by the differences in level of (in)efficiencies
in recovery value / enforcement procedures)
 in those MS where it is useful the main benefits will come from the reduced risks and
hence cheaper lending
 an out-of-court collateral enforcement system in Spain exists but it is not efficient as it
is more expensive and takes about the same time and yields similar recovery rates as a
judicial one
 SMEs in reality don't look for financing abroad
 suggestion to think about a recommendation as a valid alternative compared to
legislative proposal
 agreement with the safeguards which will be inevitably priced in by banks hence
reducing the potential benefits
Commission services enquired about the 80% figure (expressing doubts about such an high
level) and asked about the possibility of retrieving the source or the papers citing that.
88
Annex 3 – Who is affected by this initiative and how?
1. Practical implications of the initiative
Under the retained option (option 2: Minimum harmonisation of extrajudicial collateral
enforcement procedures) a harmonized legal framework for out-of-court collateral
enforcement will be established at EU level. This EU framework would aim at a minimum
level of harmonization across the EU, building on the characteristics of existing national
jurisdictions and seeking to avoid disrupting well-functioning markets. This option will
require Member States to transpose the new Directive into national legislation, and the
contractual parties (banks as lenders and businesses as borrowers) would have to adjust their
businesses to changes in the resulting national frameworks (however given the voluntary
nature of the mechanism only if it is agreed so by both parties).
2. Summary of costs and benefits
Table 14 – Overview of benefits
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Recovery rates on defaulted
business loans will increase
The EU modelled recovery
rate would increase by up to
10.4 pp. (unweighted EU
average)
Banks - This increase will
benefit banks in future
recession crises (especially
small and medium-sized
banks89
in those countries
where out-of-court systems
don't exist or are not used as
not efficient)
Decreased borrowing costs
for business loans
The lending rates are
expected to go down by
about 10 to 18 bp.
Businesses - An improvement
of the recovery rate by 10 pp. is
on average associated with
lower lending costs by 10 to 18
bp. The Commission analysis
suggests that this pricing effect
would be stronger for small
borrowers (by about 40%).
Indirect benefits
89
According the EBA, NPL ratios are highest in the small to medium category of banks
89
Foster the development of
the secondary market for
NPLs
Not quantified due to
modelling uncertainty but see
box on section 8.1 on the
linkages to the NPL
secondary market initiative
Third party NPL investors
Lower need for actual
provisioning on secured
loans
Not quantified due to
modelling uncertainty but see
box on section 8.1 on the
linkages to the prudential
backstop initiative
Banks
Administrative cost
reductions for courts as
more there will be a
reduction in the number of
cases handled in courts
Not quantifiable given the
heterogeneity of judicial
systems in Member States
and the lack of data
Administrations and indirectly
taxpayers
Table 15 – overview of costs
90
90
Due the well-developed supervisory framework for MFI, the envisaged change in contract could be complied with and supervised without
additional costs.
91
Estimate based on assumption that one person working full-time will spend 0.5 – 1.5 months on the preparation of the required contract
change (at EUR 100,000 annual salary) plus other additional costs such as technical assistance to change the relevant clauses in the loan
contracts.
92
Estimate based on assumption that one person working full-time will spend 0.5 – 1.5 months on the preparation of the required contract
change (at EUR 100,000 annual salary) plus other additional costs such as technical assistance to change the relevant clauses in the loan
contracts.
93
It is envisaged that the publicity costs borne by the creditor will remain unchanged.
94
Estimate based on assumption that one person working full-time will spend 0.5 – 1.5 months on the preparation of the required contract
change (at EUR 75,000 annual salary) plus other additional costs such as technical assistance to adapt the IT systems in the registers.
II. Overview of costs – Preferred option
Citizens/
Consume
rs
Businesses Administrations
On
e-
off
Rec
urre
nt
One-off Recurrent One-off Recurrent
Banks Debtor
s
Banks Debtor
s
Introductio
n of AECE
in loan
contracts
Direct
costs
- - - -90
-77
-77
Indirect
costs
- - EUR
4,167 –
12,500
per
bank91
- - - - -
Publicity of
AECE
Direct
costs
- - EUR
4,167 –
12,500
per
bank92
- - -93
- -
Indirect
costs
- - - - - - EUR
3,000 –
9,000
per
register
94
-
91
Annex 4 – Analytical methods used in preparing the impact assessment
This annex presents the methodology, the underlying assumptions and the data used to
quantify the economic impacts of the three proposed policy options. All three options are
forward-looking in the sense that they aim at mitigating future NPL problems, rather than the
legacy stocks of NPLs. Therefore, the results of this quantification exercise should be
considered with a number of methodological caveats in mind and the figures should be read
together with the assumptions and stylised scenarios presented in this annex.
The data used to quantify the effects on recovery rates of secured creditors come from the
World Bank Doing Business (WB DB) database's Resolving insolvency section. They
correspond to aggregate responses by experts to a common survey case study about the
resolution of a defaulted secured loan. The variables used are the 'Time to recovery', the 'Cost
of recovery' and the typical 'Outcome' (gone or going concern recovery). We complement
these data with lending rates on medium term loans (1-5 years maturity) obtained from the
ECB Statistical Data Warehouse (complemented with Bank of England data for the UK). In
calculating model recovery rates, we closely follow the approach used in the WB DB
database.95
A number of important caveats relative to the WB DB recovery rate data and underlying
methodology should be mentioned. Firstly, it is important to recall that these model recovery
rates may not reflect actual recovery rates in an economy, as they are based on expert
judgement of the survey respondents on a common case study. Secondly, actual recovery rates
on a loan depend on the level of viability of a debtor or on the quality of its assets. In this
assessment, the model recovery rates were used at the aggregate level to obtain an estimate of
the order of magnitude of the total value recovered from future NPL stocks. However, the
viability level of those future NPLs may be very heterogeneous and differ from what the WB
DB survey case study assumes. Therefore, the estimated total value recovered from NPLs
should not be read in absolute terms, but rather in relative terms across the three policy
options being assessed. Thirdly, the effects on the time and outcome of the recovery were
assumed based on the results of the Commission services' analysis of the mapping of the
current situation of extrajudicial enforcement mechanisms. It is assumed that these
mechanisms contribute to the broader outcomes of insolvency frameworks, but the existence
and extent of this causality effect is a working assumption rather than a certainty.
1. Effect on overall recovery rates
As discussed in section 6.2.1, and highlighted in Figure 7 on page 20, the presence of
extrajudicial enforcement mechanisms seems to be relevant not only in a narrow context of
the secured loan itself, but it can also have repercussions on the functioning of the wider
insolvency framework. Indeed, our assessment based on the mapping of the existence of out-
of-court (OOC) enforcement mechanisms in the EU Member States shows that the existence
95
. The detail of the WB DB methodology can be found at http://www.doingbusiness.org/Methodology/Resolving-Insolvency
92
of OOC tools seems to be associated with higher recovery rates in the WB DB database.96
Specifically, our analysis shows that this is driven by two underlying variables of the
modelled recovery rate, namely the Time to recovery and the Outcome.
Although it is not possible to infer causality from this relationship, it seems plausible to
assume that at least part of this observed correlation is due to the fact that the presence of
expedite and efficient collateral enforcement methods improves the incentives of debtors and
creditors to cooperate and find more efficient resolution of financial distress.
In evaluating the proposed options, we therefore assume some degree of convergence of the
Time and Outcome variables to a benchmark, as a result of the measures taken under each
option. The benchmark is calculated as the median Time and median Outcome among
Member States that were identified in our mapping as having OOC mechanisms for both
movable and immovable assets. The following convergence of these two values is assumed.
On Time, the three options correspond to a convergence of Member States by respectively
25%, 50% and 67% of their gap to the benchmark (1.5 years97
). On the Outcome, we assume
that Option 1 would only achieve partial convergence to the benchmark Oucome (value
recovery through restructuring) of 25%, while the two other options would lead to full closure
of the gap, as the mere presence of OOC mechanisms is likely to affect the incentives of the
debtor to seek solutions to distress at an early stage where restructuring is more likely.
Finally, the convergence under Option 1 concerns only Member States that currently do not
have OOC procedures for enforcing both movable and immovable assets, as we assume that a
soft instrument would have highest chances to be taken up by those Member States. Options 2
and 3 assume convergence of all Member States that are below the benchmark.
Summary of the options' assumptions on convergence to the benchmark
Option 1 Option 2 Option 3
Gap closure of Time
to recovery to
benchmark
25% 50% 67%
Gap closure of
Outcome to
benchmark
25% Full Full
Which MS converge Only MS that do not
have OOC for both
movable and
immovable
All MS below
benchmark
All MS below
benchmark
96
It is important to stress that the variables in the WB DB database most often correspond to resolution via
collective insolvency or restructuring proceedings, rather than through an individual collateral enforcement.
97
Again, it is important to stress that this value corresponds to the time that typically takes a collective
insolvency or restructuring proceeding.
93
Recovery rates based on the new values of Time and Outcome are calculated using the
formula used in the WB DB database.98
The resulting changes of recovery rates under the
three options are summarised in the following graph.
Figure 13 – Illustrative estimates of the impact of the options on modelled recovery rates
(pp.)
Source: World Bank Doing Business, Commission services calculations.
Quantification of the impact under a stylised future NPL scenario
The existence of extrajudicial collateral enforcement mechanisms can have significant effects
on the evolution of NPLs in adverse economic conditions. Using the results of the mapping of
the existence of extrajudicial enforcement presented in section 6.2.1, Figure 7 assesses to
what extent Member States with a complete OOC tool setup have been better able to cope
with their NPL shock compared to Member States where only some or no OOC tools are
available. The graph presents the relationship between the peak level of NPLs and the
subsequent reduction of that NPL level so far. One would expect that countries that have
reached higher NPL levels during the crisis have managed to have a stronger reduction of
NPLs thereafter.
One can see that this relationship holds well for countries where extrajudicial enforcement
tools were available for both movable and immovable assets: the slope of the curve is clearly
positive with a high R-squared. By contrast, for countries with incomplete or no OOC
mechanisms, this relationship is much weaker and less clear. Some of those Member States
were able to cope with their NPL shock relatively well, while others have been able to reduce
their NPL only very little. This situation would be consistent with an interpretation that
efficient OOC mechanisms are a sufficient condition for a swift adjustment following an NPL
shock. However, they are not a necessary condition, for example in cases where the legal and
judicial systems are very well functioning.
98
See http://www.doingbusiness.org/Methodology/Resolving-Insolvency for further details.
0
5
10
15
20
25
30
35
AT CY CZ FR DE IE LT NL SI ES UK IT LU SK HR BE BG FI HU LV PL PT RO SE DK EE EL MT
Both OOC Movable only No OOC
Option 1 Option 2 Option 3
94
Figure 14 - Non-performing loan ratio for MS with out-of-court collateral enforcement and
for those with incomplete or absent OOC mechanisms (%)
Source: ECB SWD, Commission services analysis
Given the likely relevance of extrajudicial enforcement procedures for the development of
NPLs, the economic impacts of the proposed options were assessed on an illustrative future
NPL scenario. The aim is to give an order of magnitude of the level of NPLs in a stylised
adverse economic environment and provide an order of magnitude of the positive effect of
improved OOC mechanisms on recovered value. The following steps are performed:
 We start by assuming that the stylised future peak NPL rate for each Member State is
an average of a common component and of a country-specific component. The former
is assumed to be the median of the NPL rate peak for all EU Member States in the
latest crisis period. The latter is assumed to be the actual peak of each country in the
latest crisis period.
 We next use this peak total NPL rate together with data from the 2016 EBA EU-wide
Transparency Exercise to estimate the peak corporate NPL rate for each MS.99
 We obtain the level of peak corporate NPLs in EUR million that are secured by
collateral by applying the above corporate NPL rate to the level of MFI lending to
non-financial corporations as at 2016100
, and applying the share of secured loans in
total loans. Both of these indicators were calculated from ECB SDW data.
 Finally, the level of secured corporate NPLs split between large companies and SMEs
is performed using again the 2016 EU-wide Transparency Exercise data.
The recovered value from secured corporate NPLs in this stylised future NPL scenario in the
baseline case is obtained by applying each MS's typical recovery rate calculated from the
World Bank Doing Business data to the calculated future stock of secured corporate NPLs.
This yields a total of EUR 345,967 million.
99
More specifically, we use the EU value of the share of corporate NPLs in total Non-performing debt
exposures, and the share of corporate loans and advances in total debt instruments.
100
Implicitly we make the assumption of no nominal indebtedness change, i.e. corporate indebtedness as a share
of GDP would be decreasing over time with nominal GDP growth.
y = 0.51x - 0.80
R² = 0.61
y = 0.08x + 3.17
R² = 0.05
0
2
4
6
8
10
12
14
0 10 20 30 40 50
Reduction of
NPL from peak
to 2017 (pp.)
NPL peak (%)
MS with both OOC
mechanisms
MS with partial or no
OOC mechanisms
95
The additional recovered value in each of the three options is obtained by applying the
improvement of the typical recovery rate (in pp.) to the stock of secured corporate NPLs,
yielding respectively for options 1, 2, and 3 EUR 1,991 million, EUR 8,083 million and EUR
8,965 million.
Quantification of the impact under on future corporate borrowing costs
In order to quantify the effects of the proposed collateral enforcement measures on
companies' cost of borrowing, we use the results of AFME (2016). The report presents a
model of the effects of recovery rates in insolvency on corporate borrowing spreads, using a
micro-econometric panel study using individual bond yield spreads. The model specification
that we consider as the most relevant is one which controls for unobserved country
specificities using country fixed effects, yielding a coefficient of -0.0178, i.e. a 10 pp.
improvement in recovery rates is associated with approximately 18 basis poins reduction in
the corporate borrowing cost.
Table 16 – AFME estimates of impact of recovery rates on corporate yield spreads (selected
parts presented)
Source: Presented are selected parts of Table 1, AFME: "Potential economic gains from reforming insolvency
law in Europe", February 2016.
In order to corroborate the results presented in AFME (2016), we develop a simple panel data
model at the country level using monthly data of the MFI lending rate to companies from the
ECB SDW. We use loans lower than EUR 250,000 as a proxy for lending to SMEs, and loans
higher than EUR 1 million as a proxy of lending to large companies. Our results confirm the
order of magnitude of AFME, albeit with coefficients somewhat smaller than in the AFME
report and with a less obvious statistical significance (ranging from -0.008 to 0.014). The
effect seems to be stronger on SMEs, both statistically and economically. We use our results
to set a lower bound of the effect of recovery rates on borrowing costs of 0.01, i.e. a 10 pp.
improvement in recovery rates leads to a 10 bp. reduction in corporate borrowing costs.
96
Table 17 - Estimates of impact of recovery rates on corporate borrowing costs
Source: ECB, Eurostat, World Bank Doing Business data. Commission services analysis. Note: Three
regressions of aggregate lending rates to SMEs and Large companies are presented (ordinary least squares, panel
regression with random effect, panel regression with fixed effect). Presented p-values are based on clustered
standard errors.
The total annual savings are obtained by multiplying the reduced borrowing rates with the
stock of secured corporate lending obtained from the ECB SDW, assuming it will remain
constant in nominal terms. It is important to note that this level of savings would be achieved
only over a longer horizon, once the stock of outstanding loans is fully rolled.
OLS Panel RE Panel FE OLS Panel RE Panel FE
Sovereign yield 0.307*** 0.232*** 0.229*** 0.340*** 0.278*** 0.279**
(0.00) (0.00) (0.00) (0.00) (0.00) (0.04)
3-month rate 0.798*** 0.689*** 0.689*** 0.410*** 0.543*** 0.543**
(0.00) (0.00) (0.01) (0.00) (0.00) (0.02)
Recovery rate -0.011*** -0.014*** -0.014* -0.010*** -0.009 -0.008
(0.00) (0.00) (0.09) (0.00) (0.23) (0.45)
Constant 3.822*** 4.390*** 4.354*** 2.608*** 2.752*** 2.608**
(0.00) (0.00) (0.01) (0.00) (0.00) (0.04)
N 1521 1521 1521 1246 1246 1246
R2-adj. 0.437 n/a 0.415 0.366 n/a 0.350
p-values in parentheses
* p<0.10 ** p<0.05 *** p<0.01
Lending rate (SME) Lending rate (Large)
97
Annex 5 – Main features of national out-of-court collateral enforcement
mechanisms in the EU
Mapping of out-of-court enforcement mechanisms in Member States – Summary table
MS
Is out-of-court
realisation of
assets permitted
for security over
IMMOVABLE
assets?
Is out-of-court
realisation of
assets permitted
for non-
possessory
charge over
MOVABLE
property?
Key features
Austria YES YES
either public auction or private sale
if the object holds an official
market or stock price
Belgium NO YES
10 days after notification, the
creditor can ask a bailiff to
organise a public sale (auction) or
private sale or the renting/leasing
of the asset.
Bulgaria NO YES
Appropriation or private sale. The
creditor is required to act with the
care of a “good merchant
Croatia NO YES
Sale through a notary public or
through real estate agency upon
agreement of all parties.
Cyprus YES YES
introduced recently in 2014 -
private auction which does not
involve a government agency, with
specific time limits on subsequent
steps in the procedure, which is
subject to a judicial review only
where strictly necessary
Czech
Republic
YES YES
Security transfers are used very
rarely in banking practice. If at all,
used for receivables used as
collateral
Denmark NO NO n/a
Estonia
YES, but minimum
court involvement
needed
NO n/a
Finland NO YES
Creditor notification that
collateral will be sold if the claim
is not paid within a certain period
of time, at least one month. If real
estate solely or mainly as a
permanent residence by the
collateral owner the period of time
98
must be at least two months.
France YES YES
Fiducie, hypothèque and cession
des créances professionnelles dite
"cession Dailly. Pacte
commissoire allows the bank to
become the owner of collateral
automatically upon borrower's
default. Consumers are also
included.
Germany
YES, but minimum
court involvement
needed
YES
For movable assets, creditor can
ask an enforcement officer to sell
the assets on his behalf, or a direct
sale can be used, or creditor can
be permitted to take possession of
the assets. For immovable assets,
agreement for creditor to become
owner of the property upon
debtor's default can intervene only
ex post, . Creditor has to go to
court to obtain a title for
enforcement. Such title can be
obtained in accelerated
proceedings where the court
decides on the basis of the
mortgage deed only and the debtor
can bring objections only
afterwards.
Greece NO NO n/a
Hungary NO
YES but unclear
how broad the
scope is
2014 new Hungarian Civil Code
prohibits security agreements with
a fiduciary element
Ireland YES YES
Most common procedures are the
appointment of a receiver and the
power of sale conferred on
mortgagees. A receiver has an
obligation to obtain the best price
for the secured assets. A prudent
receiver will require evidence of
market testing and an independent
valuation.
Italy YES YES
the new law was introduced quite
recently - appropriation is the
enforcement mechanism
99
Latvia NO YES
Enforcement procedure through
sale. The scope includes natural
persons if the pledged property is
expressly mentioned in the
Commercial Pledge Act (vehicles,
boats, planes, shares, intellectual
property, herd).
Lithuania YES YES Sale through notary.
Luxembourg
YES, but minimum
court involvement
needed
YES, but
minimum court
involvement
needed
Commercial pledges may be
enforced by the pledgee who is
already in possession of the asset,
and after serving a summons to
pay, by seeking a court decision.
Court decision fixes the conditions
of the sale by public auction.
For pledges over general business,
upon the default of the debtor, the
pledgee must notify pledgor and
attach the pledged assets without a
judicial order. Pledgee must
request an authorisation from
Court to sell assets.
Malta NO NO n/a
Netherlands YES YES
All parties and collateral assets are
eligible. Private sale requires court
authorisation. Secured creditors
can enforce right in bankruptcy,
unless court suspended such
enforcement.
Poland NO YES
All parties are eligible. Only
registered pledges of moveable
assets (excluding ships) are
enforceable OOC. Appropriation
and public sale are foreseen.
Portugal NO YES
All parties can agree on an
extrajudicial enforcement of a
pledge of moveable assets, via
private sale. Obligation of "fair
market" price in sale.
Romania NO YES
All parties are eligible. Only a
mortgage on moveable assets can
be enforced OOC.
Slovak
Republic
YES YES
All parties are eligible. Private sale
can be agreed contractually and is
the only extrajudicial method.
Slovenia
YES (loans
originated after
2013)
YES All parties are eligible.
100
Spain YES YES
All parties are eligible. Only
public sale by public notary is
available.
Sweden NO YES
All parties are eligible. Only
movable assets
United
Kingdom
YES YES
All parties are eligible. The
framework provides a number of
alternative enforcement methods.
Total 15 YES / 13 NO 24 YES / 4 NO
Austria
Source of information: Ministry of Justice response and SSM report
Scope (contractual parties of the loan)
No restrictions although the statutory waiting period is reduced in case of corporate
transactions (see procedural steps).
Categories of assets used as collateral
A legal framework exists for out-of-court procedures regarding debt recovery for
moveable tangible objects as well as bearer and order instruments. In general (outside the
scope of the legal framework for moveable tangible objects) the person providing the
collateral (especially for immovable objects) and the one receiving it can agree on an out-of-
court usage or sale. In this case the following legal provisions should be followed (as per
Supreme Court of Justice):
 the agreement on only the best possible sale of the pledge is considered invalid and
void, but not the sale at an assessed price
 discretion over the pledged asset granted to the pledgee is considered arbitrary
For immovable assets see below (procedural steps – real estate).
Existence of private sale, auction and appropriation methods
The pledgee can either auction the pledged asset publicly or sell it privately if the object
holds an official market or stock price.
Procedural steps
Non real-estate assets: Upon maturity the pledgee must notify his intention to sell the pledged
asset to the pledgor as well as state the amount of the remaining claim. Subsequently, the
pledgee has to wait for a month to give the pledgor the possibility to repay and prevent the
realization of the sale (reduced to one week in case of corporate transaction). Time and place
of the auction have to be made public and be communicated to the pledgor and third parties
that have a right on the pledged asset. Objects with a stock or market price can be sold
privately by the pledgee, as an alternative to the auction. In specified cases the creditor is
101
permitted to sell pledged assets before the debt is past due, for example if the deterioration of
the assets is imminent.
Real estate sales: before overdue payments occur, the owner/debtor and the creditor may
contractually agree that the sale of the property by the creditor is permitted so long as it is not
sold at a price lower than the valuation price at the time of the sale. Alternatively, the creditor
may be permitted to sell to a person designated by the debtor at an agreed price. After the debt
has become past due, bilateral agreements are permitted without any restrictions.
Any other relevant information
The pledgees and pledgors can agree on deviating terms on-out-of-court settlements and
usage of the pledged asset (however an agreement where the asset goes to the creditor is
invalid and void, as is one where the creditor sells the object at a predetermined price or just
keeps it).
Belgium
Source of information: Ministry of Justice response
Scope (contractual parties of the loan)
Consumers are excluded.
Categories of assets used as collateral
Tangible and intangible moveable assets, receivables with the exclusion of immovable
assets
Scope (type of security rights)
The new law created a new non-possessory pledge (which had to be registered in a new
national registry).
Existence of private sale, auction and appropriation methods
After a delay of 10 days, the secured creditor can ask a bailiff to go ahead with a public sale
(auction) or private sale or the renting/leasing of the asset/collateral.
Procedural steps
Conditions for out-of-court mechanisms:
 the secured creditor must get possession of the asset/collateral first after debtor's
default (after consent by the debtor - if no consent secured creditor must go to court)
 the realisation of asset/collateral should be carried out with due care and should be
commercially and economically viable and it is the responsibility of the secured
creditor to assure that
 the realisation of asset/collateral can always be contested ex-ante and ex-post
 the debtor or the collateral giver should be informed at least 10 days before the
realisation of the asset/collateral takes place
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Any other relevant information
The entry into force of the new law is 01 January 2018 and was inspired by Uncitral 2016
model law on security on moveable assets. The philosophy of the new law is to limit the
intervention of judges/court only when really necessary.
Bulgaria
Source of information: K&L - Gates European Insolvency and Enforcement Country Guide
2017
Scope (type of security rights)
Together with the mortgage, the most commonly used secured instruments include non-
possessory (registered) pledges. Registered pledges are a type of security instrument that
creates limited rights in rem over certain classes of assets without the need for physical
delivery or control by the creditor. Assets that may be provided as security under a non-
possessory registered pledge include movable assets (including unfinished goods and raw
materials), accounts receivables, company shares in limited liability companies, securities and
certificated securities. One of the main benefits of registered pledges is that they can be
enforced out-of-court, without the need of obtaining prior judgment, writ of execution
or any other form of court action. The foreclosure starts with the secured creditor filing a
statement with the relevant public registry with which the pledge is registered and sending a
separate foreclosure notice to the pledgor.
Existence of private sale, auction and appropriation methods
As the moment of filing of the foreclosure statement the secured creditor is entitled to
take possession of the pledged asset and/or take measures to preserve its value. As of that
moment the floating charges freeze and crystallise with respect to any assets that are
considered part of the floating pool. The secured creditor may choose the sale method (as
opposed to the procedure under the Bulgarian Civil Procedure Code). However, the secured
d qu d w h h “g d m h ”. For the purposes of the
foreclosure, the secured creditor has to appoint an accountant that acts as depository for
collection and distribution of the proceeds from the sale. Upon the sale of the collateral, the
depository draws a list of the secured creditors and distributes the foreclosure proceeds in
accordance with their priority or share of the secured claim, if they enjoy the same priority.
Any other relevant information
The mortgage is a security instrument creating rights in rem in favour of a creditor over
property of the mortgagor (the debtor or a third-party mortgagor). Mortgages can be created
only with respect to land, buildings, construction rights (superficio) and other real estate rights
or with respect to ships or aircrafts. When enforcing a mortgage the secured creditor only
has the right to sell the mortgaged property through a public official (bailiff) and to
receive the proceeds from such sale in satisfaction of its claim. The sale process is
organised as a public auction, which is subject to the control of the courts. The secured
creditor is not entitled to take possession or ownership of the mortgaged property, but
has the right to participate as buyer in the public auction and to bid with its claim. The
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mortgage is established by means of a written contract in the form of a notarial deed
registered with the Real Estate Registry in Bulgaria. The registration of the mortgage is a
condition for its validity and not only a perfection requirement. Creation of a mortgage
involves payment of certain notarial and registration fees calculated as a percentage of the
secured debt. Under the Bulgarian Civil Procedure Code, the creditor is entitled to
commence enforcement of the security under the mortgage deed by directly obtaining a
court order for immediate payment together with a writ of execution. Thus, the
mortgagee is not entitled to first obtain a final and effective court judgment in order to
proceed with enforcement, which significantly reduces the time and costs for enforcement as
compared to non-secured debt. The court payment order with writ of execution is being issued
in a formal procedure where the creditor does not have to prove its receivables, but only file a
standard application form and pay a statutory fee of 2% of the security interest. On the
grounds of the writ of execution, it is entitled to commence enforcement proceedings through
a bailiff.
Croatia
According to EBRD assessment the out-of-court realisation of assets is permitted for non-
possessory charge over movable property whereas for security over immovable assets the
enforcement must be done via court administered enforcement proceedings. However, the
court may entrust the sale to a notary public. In addition, if all the interested parties
(mortgagor, mortgagee, holders of other real rights) agree, the sale can be done through real
estate agency.
Cyprus
Source of information: Permanent Representation of Cyprus to the EU
An out-of-Court enforcement tool that Cyprus has adopted in 2014 is the foreclosure process,
which was enforced on the 9th of September, 2014 by amendment to the Transfer and
Mortgage of Immovable Property Law. The new foreclosure framework allows creditors to
arrange a private auction which does not involve a government agency, with specific time
limits on subsequent steps in the procedure, which is subject to a judicial review only where
strictly necessary.
Prior to this amendment, the disposal of collateral could be achieved only via public auctions
organised by the Land Registry Department, a governmental department. By the amendments
introduced in 2014, when the debtor is in default, the secured creditor, that has a registered
contractual mortgage over the immovable property of the debtor, may carry out a private
auction for the sale of this immovable property, without any intervention by the Land Registry
Department. This new foreclosure process may be initiated by any creditor, irrespective of
whether this is a financial institution, and is applicable against the mortgage/security of all
commercial and personal loans, of businesses and natural persons alike.
The secured creditor thus gives an initial notice to the debtor informing him of the default
and, at this point, the debtor may request a restructuring according to the Arrears Management
Directive (out-of-Court restructuring process provided by financial institution that usually is
concluded within 5 months) or referral to mediation (which as provided in the relevant
104
legislation shall be resolved within 2 months) as provided in the said Law. During this period,
the debtor may also appeal to Court for any reason, though essentially only to dispute the
amount owed to the creditor. Upon failure of any restructuring attempt or any appeal to Court
or upon expiry of 120 days since the initial notice, the secured creditor may proceed with the
foreclosure of the mortgaged property, giving though two further notices of 30 days each to
the debtor ending on the date that the auction is set. During this 30 day period, debtors may
apply Court to challenge the foreclosure procedure, only on the grounds related to the service
of the notice and its form and content.
If, additionally, during these periods of notice, the debtor secures a protection order from the
Court for the stay of proceedings against him- either under a Personal Repayment Scheme as
provided in the Personal Insolvency Law for natural persons or under an Examinership as
provided in the Companies Law- the foreclosure process is suspended.
Since the entry into force of this amendment to the Transfer and Mortgage of Immovable
Property Law, the necessary infrastructure to carry out private auctions were put in place,
auction houses were established in all districts and licensed and trained auctioneers undertake
the job. To the point that this out-of-Court enforcement of collateral mechanism has been
utilized up to date, it has proved to be fairly efficient, effective and, most importantly,
expedited.
Additionally, and primarily due to the success of the above mentioned speedy forced sale of
collateral, financial institutions also effected, as an alternative, voluntary arrangements of
debt-to-equity swap. This is acquiring property from the debtor, usually immovable, in
satisfaction of debts. Accordingly, an amendment to the Activities of Financial Institutions
Law enforced in 2017, enables financial institutions to acquire, buy, rent and sell immovable
property, as well as share capital in other companies, for a specified period of time.
Also, by the introduction of specialised legislation and regulations, Financial Institutions were
enabled to sell portfolios of loans, thus enabling the development of secondary markets for
NPLs in Cyprus.
Receivership is another out-of-court procedure available to creditors secured by floating
charge on the debtor-company. It is a procedure whereby a floating charge holder-creditor
appoints a Receiver and Manager on the debtor-company, and consequently also to its assets
(as collateral to a loan agreement). Even though, this is an enforcement tool, there have been
many cases of restructuring and reorganizing the business via the appointment of a Receiver
and Manager, without having to sell all or part of the assets of the Company. The Registrar of
Companies, in accordance to Companies Law, acts as an administrative body for registering
the floating charge, as well as the appointment of the Receiver and Manager. Any work outs
during the Receiver and Manager does not necessarily need to be endorsed to the Courts,
unless the parties agree to do so, especially if a dispute between the creditor and the debtor is
already before the Court.
Czech Republic
Source of information: Ministry of Justice response and expert group feedback
Scope (contractual parties of the loan)
105
No limitation in terms of scope except with regards to the limitation on agreements entered
into pre-default for SME and consumers.
Categories of assets used as collateral
All types of chargeable/transferable collateral may be subject to the security transactions
described below. For tax and other reasons, real estate is usually mortgaged rather than
transferred by way of security. Because Czech law allows non-possessory charges of movable
assets via a register of charges operated by the Notarial Chamber, as well as for other reasons
(mainly having to do with rules on priorities), security transfers are used very rarely in
banking practice. If at all, they might be used where receivables serve as the collateral.
Scope (type of security rights)
Rigth in rem (i.e. concrete asset) collaterals are: pledge (Section 1309 et seq. of Civil Code -
CC),sub-pledge (Section 1390 et seq. of CC), retention right (Section 1395 et seq. of CC) and
transfer of right as security (Section 2040 et seq. of CC). There are different out-of-court
mechanism for the first three (pledge, sub-pledge, retention right) and the last (transfer or
right as security). Transfer of right as security is usually used as a possibility how to secure a
loan by claims or other movable assets (under CC, some rules regulating movable assets are
applicable to claims as well). Immovable assets are almost always secured by pledge in the
Czech Republic.
Existence of private sale, auction and appropriation methods
In regard of pledge, Section 1359 of CC regulates procedure of fulfilment of secured debt
via liquidation of the pledge. Such liquidation can be conducted out-of-court as well,
based on written agreement concluded between creditor and the person providing
collateral (i. e. the debtor or a third party) or in auction in a sense of Act No. 26/2000 Coll.,
on public auctions, as amended. These rules apply to sub-pledge (see Section 1393 of CC) and
to retention right (see Section 1398 of CC) as well.
In regard of transfer of right as security no ingression of court is necessary in order to
satisfy the creditor. The debtor secures his debt by temporarily transferring a right (i. e.
ownership right, right to revenues, etc.) to his creditor by means of a contract on
transfer of a right as security. Transfer of a right as security is presumed to be a transfer
with a cancellation condition that the debt will be fulfilled (Section 2040 of CC). If the debt is
not fulfilled duly and in time, the creditor does not have an obligation to transfer the right
back to the debtor. If the right is transferred back after due and timely fulfilment, the creditor
gives over all yields of the right against reimbursement of all reasonable expenses incurred in
connection with the transfer of a right as security.
The Act on Financial Securing is applied to transfer of a right as security whenever certain
specific criteria of the Act are met. These are related to the characteristics of the collateral and
parties to contract. The special regime can be negated by agreement of both parties (Section 8
Subsection 2 of the Act on Financial Securing) which means the securing is established in
accordance with the general provisions of CC regulating transfer of right as security.
Procedural steps
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With respects to charges/mortgages, it is thought that S. 1315 (combined with i.a. S. 1359,
1360 and 1365) allows parties to agree on a private sale or even on forfeiture of the collateral,
provided that the charge/mortgage agreement does not (a) allow the chargee/mortgagee to
proceed with unlimited discretion as to the method of the sale, or (b) to acquire the collateral
at a discretionary price or a price fixed up-front. It is thought that once the secured debt has
become due and payable, the limitations as to the method of sale or setting of the price
fall away, except where the chargor/mortgagor is a consumer or a sole proprietor
running an SME business. It is thought that enforcement requires payment default, rather
than just non-payment default. With respect to charges/mortgages, the chargee/mortgagee
must notify the chargor/mortgagor of commencement of enforcement in writing (S. 1362) and
the chargee/mortgagee may proceed with the sale of the collateral at the earliest after 30
days following such notice (S. 1364). Finally S. 1360 specifically provides that an agreement
on sale outside of an auction is binding on the chargor's/mortgagor's legal successors.
With respect to transfers of title by way of security, S. 2040(2) of the Civil Code contains
an assumption that the transfer of the collateral has been agreed with a condition subsequent,
the condition being that the secured debt has been paid. S. 2044(1) provides that where the
secured debt has not been paid, the transfer shall become unconditional. S. 2044(2)
provides that where the usual price of the collateral is obviously higher than the amount of the
secured debt, the transferee shall pay the difference to the transferor. Finally a transfer of the
secured receivable pre-default should thus not have an impact on the transferee's rights under
S. 2044.
Any other relevant information
The rules cited here only took effect on 1 January 2014
Denmark
Source of information: Ministry of Justice
No extrajudicial mechanisms for the enforcement of secured loans currently exist in Denmark.
Estonia
Source of information: SSM report, EBRD, Doing Business
Lenders have several legal options to begin judicial enforcement procedures, but in
every case there is the requirement of a court judgement/decision. The out-of-court
private sale of the pledged property may take place only by mutual agreement between the
mortgage lender and borrower. Estonia amended its code of enforcement procedure in
2009/2010 to allow out of court enforcement after notarisation of an agreement allowing for
this.
Finland
107
Source of information: Ministry of Justice
Scope (contractual parties of the loan)
The legislation does not differentiate between corporates and sole traders.
Categories of assets used as collateral
National legal framework in Finland provides an extrajudicial mechanism, which
enables a secured creditor to enforce collateral in the form of movable assets. Provisions
thereof are in Chapter 10 Section 2 of the Code of Commerce (kauppakaari 3/1734, 10:2 §).
No extrajudicial mechanism for the enforcement of collateral in the form of immovable
assets.
Existence of private sale, auction and appropriation methods
When selling the collateral, the creditor shall also take account of interests of the owner of the
collateral, e.g. in choosing the manner of the sale.
Procedural steps
A secured creditor may sell collateral and collect on his claim out of the sale price if:
 The claim has fallen due for payment;
 After the claim has fallen due, an owner of the collateral has been notified that the
collateral will be sold if the claim is not paid within a certain period of time, length of
which must be at least one month; and
 The said period of time has passed and the claim is still not paid.
Even if the aforementioned conditions are not fulfilled, the collateral may be sold if otherwise
its value would evidently decrease, thus causing essential damage.
The provisions are mainly discretionary and the parties may agree to depart from them or put
them totally aside. However, if the collateral consists of shares that provide a right of
possession to an apartment used solely or mainly as a permanent residence by the owner of
the collateral, the period of time referred to in paragraph (b) must be at least two months and
no exceptions to the aforementioned conditions can be made.
Any other relevant information
If an owner of collateral has been declared bankrupt, the extrajudicial mechanism is not
applicable but provisions in the Bankruptcy Act (konkurssilaki 120/2004) apply instead. The
extrajudicial mechanism presented not applicable either after the commencement of the
restructuring proceedings.
France
Source of information: Government response to the public consultation
Scope
108
Contractual parties of the loan
Broader than banks and companies and entrepreneurs. It also covers consumers.
Categories of assets used as collateral
Moveable and immovable assets. The main residence of the borrower is excluded.
Type of security rights
Several types of security rights may be enforced out-of-court: la fiducie, l'hypothèque, et la
cession des créances professionnelles dite "cession Dailly"101
.
Fiducie was introduced in French law by law n° 2007-211 of 19 February 2007.
In the case of fiducie and cession Dailly, the bank is the owner of collateral from the moment
the security is concluded.
Type of enforcement procedure
- Appropriation in the case of Fiducie.
- creditor becomes the owner of collateral automatically upon borrower's default.
Procedural steps
The pacte commissoire allows the bank to become the owner of collateral automatically upon
borrower's default. This mechanism has been introduced through Ordonnance of 23 March
2006. It can be used in relation to pledges, mortgages or receivables.
Germany
Source of information: Government response to public consultation, internal analysis and
K&L Gates
Scope (contractual parties of the loan)
Anyone on either side of the deal, i.e. no restriction for creditors to be only banks, no
restrictions for debtors to be entrepreneurs. The debtor's protection is anchored in
 The general provision against immoral agreements (contra bonos mores) which
precludes taking out collateral in a value in excess of the claim plus a certain safety
surcharge, and for examples prevents collateral over all the assets of a debtor;
 Consumer Credit Act;
 the law on general terms and conditions which render certain agreement invalid;
 enforcement and insolvency law which exempts certain personal assets from
enforcement, which in practice means that creditors will not accept such assets as
collateral in the first place.
101
Established by law nr. 81-1 of 2 January 1981; article L.313-23 of Code monétaire et financier.
109
Categories of assets used as collateral: movable and immoveable assets
Movables, both tangibles and intangibles including claims, but separate rules for these. The
security right can be created over existing and future assets, but they must be determined; the
rich case law, however, reveals that certain manners of determinability suffice, e.g. all assets
contained in a determined room over time, which makes a revolving security right/“floating
charge” possible. Also, it is possible to agree for the debtor to replace assets (e.g. when
buying a new machine or for security rights in an inventory which is revolving, with parts
used in production and new stock incoming) with an anticipated title transfer in such assets at
the moment of granting the collateral.
Securable claims: Present but also future or conditional claims. The collateral can also be used
to secure claims which the parties did not anticipate when creating the collateral, by mutual
agreement to include such claims.
Scope (type of security rights): retention of title, chattel mortgage for movable, and mortgages
and land charges for immovable assets
Type of enforcement procedure: appropriation
Procedural steps
Security interests in real property- mortgages and land charges- may be enforced under the
Act on Enforced Auction and Receivership (Gesetz über die Zwangsversteigerung und die
Zwangsverwaltung). In this case, the secured party may initiate the foreclosure proceeding,
which is not necessarily directed at a foreclosure auction, but may also result in a receivership
covering the proceeds from the administration of the collateral.
The holders of the security interests are entitled to the proceeds in accordance with the rank of
the security interest, i.e. a first ranking mortgage has priority over a second and third ranking
mortgage. Security interest holders’ claims are, however, subordinated to specific claims and
entitlements, such as property tax claims relating to the collateral or in the case of a
receivership, claims for compensation of costs for the maintenance of the col-lateral.
Any other relevant information
 Enforcement outside insolvency for the movable assets instruments is determined by
agreement between the parties which can allow for the creditor to obtain ownership and to
sell the collateral on the market. Enforcement outside insolvency for real estate mortgages
allows for an upfront agreement for the debtor to accept immediate enforcement, limiting
court involvement. For real estate, no upfront agreement to a market sale permitted to
protect the debtor. However, in auction process, real estate can be sold at a certain
percentage of (i.e. below) market value.
 Enforcement in the debtor's insolvency gives the collateral taker a right to pre-emptive
satisfaction which results in speedy realization of the collateral by the insolvency
administrator, before the insolvency proceedings over the remaining estate are sorted out.
The insolvency administrator may decide to turn over movable assets to the creditor for
sale on the market, or undertake a market sale himself, where preferable to an auction. For
real estate, realization below market value possible but limits in relation to the market
110
value apply.
Movable assets: Enforcement outside insolvency: It is considered permissible for creditor and
debtor to agree that the creditor, in case of the debtor's default, shall be allowed to take the
assets in his possession and/or to sell them on the market. Such agreement is frequent in
practice.
The standard way of enforcement would be as follows: If the debtor does not voluntarily
relinquish possession (direct possession rather than the intermediated form) to the creditor, the
creditor will have to obtain a title in court for his claim to bring his property into his
possession (vindicatio). Based on such title, the creditor can ask an enforcement officer to sell
the assets on his behalf, or a direct sale can be agreed between the parties in advance, or the
creditor can be permitted to take possession of the assets without involving the court and
enforcement officer. The proceeds exceeding the secured claim, if any, will have to be turned
over to the debtor. There is no expert's opinion and the assets can be sold also below market
price, but the creditor has to make an effort to obtain good consideration, otherwise he will be
liable for damages; in order to defend himself against such liability, the creditor will often
obtain an independent expert's opinion before the sale on the market.
Immovable assets- Enforcement outside insolvency: Agree for the creditor to become the
owner of the property upon debtor's default only after the fact, no anticipated agreement
possible. The creditor has to go to court to obtain a title for enforcement. However, to speed
up foreclosure, such title can be obtained in accelerated proceedings where the court decides
on the basis of the mortgage deed only (Urkundenprozess) and the debtor can bring objections
only afterwards. The parties can also agree in advance, in a notarial deed, for the debtor to
accept immediate enforcement (Unterwerfung unter die sofortige Zwangsvollstreckung),
which will entitle the creditor to mandate the enforcement officer without court involvement,
and the debtor has to bring a claim in case of objections.
If foreclosure is effected through an auction of the property, the property can (and often will)
be sold below market value. There are certain minimum offers, relative to the market value as
estimated by an independent expert, which decrease if the property cannot be auctioned off at
the first appointment.
General remarks:
The non-possessory security right for movables is title transfer by way of security
(Sicherungsübereignung). The non-possessory security right cannot be in the form of a pledge
but has to be in the form of title transfer with the accompanying agreement to only use the
title acquired in the goods as collateral. While outside the Civil Code, this instrument has been
acknowledged in various other statutes and in the course of its long history (since about 1880)
has produced a great amount of rich case law, which could help to define elements of any
non-possessory collateral instruments (e.g. the determinability of the assets). Such a title
transfer is treated like a pledge in individual enforcement and in insolvency. It can be tailored
to the parties' needs with great flexibility, allowing for accommodation of all salient economic
elements of the IT non-possessory pledge. Its efficiency lies in the speediness of enforcement,
where various ways including a direct sale can be agreed, including in the debtor's insolvency,
111
where pre-emptive satisfaction grants the speedy realization (which can also be direct sale by
the creditor, upon the insolvency administrator's discretion) of the collateral.
For real estate, only mortgages are used, which are non-possessory anyhow. No conditional
title transfer is possible for real estate but the conditional right to request title transfer later on
can be secured by a priority notice (Vormerkung) in the land register; mortgages in their
various forms are considered more practical.
These security rights are largely abstract/remote from the underlying claim, i.e. they are
unaffected by a contestation of the underlying repayment claim (for mortgages, only the more
common variety). From a strictly DE law viewpoint, one would have to speak of the collateral
taker (instead of the creditor) and the collateral provider (instead of the debtor), also to
indicate that collateral can be posed by third parties (important e.g. in group structures where
an affiliate/subsidiary can secure another group company's debt). The feature which makes
security rights under German law particularly flexible is, in effect, the abstractness of the
transfer of the right in rem from the underlying loan contract between the parties, which in DE
law means that either contract is valid independent of the validity of the other and objections
arising from the loan contract have, in principle, to be raised between the parties but will not
affect the circulation of assets. While the most important single feature, this is also so
fundamental as to render it impossible to impose on other national civil laws.
This means that DE law will not speak about the loan contract when discussing security
rights, but about the security rights themselves and the security/fiduciary agreement
accompanying the creation of the security rights, which puts in place the respective rights and
obligations of both creditor and debtor as regards the creation of the security, the treatment of
the assets, what constitutes default, and the manners of enforcement permitted, all within
boundaries of cogent law and a vast array of case law. The strong feature of the DE law is the
strong case law around the rather old provisions, which provide a high level of legal certainty
and could be a point of reference for designing the elements of a harmonized collateral
instrument, e.g. as regards determinability of the assets which is likely to be an issue with all
non-possessory collateral instruments.
While enforcement requires a title, to be obtained in court, such title can be obtained quickly
if all prerequisites emanate from a written deed (Urkundenprozess). Furthermore, debtors can
agree, already when creating the security right, to immediate enforcement, meaning the
creditor can directly ask an enforcement officer (Gerichtsvollzieher) to proceed to
enforcement. Finally, for movable assets, creditor and debtor can agree in advance that the
creditor takes possession and sells the assets on the market (the formerly banned lex
commissoria); for real estate, the insolvency administrator can give such right to the creditor.
No non-recourse provision, but it could usually be agreed between the parties; not usually an
issue since security rights abstract from the loan. In practice, the unsecured part of the claim
will not have much value in insolvency and will be handled entirely separately in both
individual enforcement and insolvency.
No special security rights exist just for banks. Putting in place a special security right just for
banks or other entities which are licensed to conduct lending on a commercial basis could be
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inconsistent with the CMU goal to encourage non-bank lending, e.g. loan-originating funds or
peer-to-peer lending. However, banks are restrained in the use of general terms and conditions
for agreeing to certain features considered detrimental to the debtor if the debtor is a
consumer###. In practice, this means that certain features will not be agreed with consumers
since too cumbersome, but only with entrepreneurs and for loans of a certain size to make
specific agreements/deeds worthwhile.
Movable property:
Type of security right: For movable assets, a non-possessory security right exists in the form
of full title transfer by way of security (Sicherungsübereignung). This title transfer by way of
security is not explicitly mentioned in the German Civil Code. However, it is based on
specific features of the German Civil Code, has been acknowledged by the courts for over one
hundred years, and is meanwhile explicitly mentioned in other Statutes, including the Code of
Civil Procedure (for enforcement actions) and the Insolvency Code, where to a certain extent
it is treated like a pledge (which for all practical matters it has come to replace; the title
transfer by way of security in fact developed in lieu of a non-possessory pledge since a pledge
always requires transfer of possession to the collateral-taker, which deprives the debtor of the
right to use, burdens the creditor with the possession and creates publicity shunned by
debtors). The title transfer can be unconditional with an agreement for later re-transfer, or
conditional upon the condition subsequent of payment of the secured debt.
The title transfer also, in theory, requires transfer of possession. However, DE law allows for
transfer of possession to be substituted by creation of “intermediated possession” of the
creditor, meaning an agreement by which the debtor acknowledges to hold possession solely
on behalf (as an intermediary) of the creditor (Besitzkonstitut). Such intermediated possession
can be anticipated for incoming assets to allow for a revolving security. The “substitute for
possession” is not transparent for third parties and thus quite a departure from the traditional
concept of possession in property law. This feature is rather unique in the EU and the lack of
transparency is the reason why the instrument of title transfer by way of security has not been
acknowledged or accepted by courts in other MS. There is no register for title transfer in
movables by way of security.
The title transfer is accompanied by a separate agreement between creditor and debtor
providing for their respective rights and obligations with regard to the assets. While the
creditor obtains full title, he holds that title as the debtor's fiduciary. If the creditor breaches
the terms of this agreement, he is liable to the debtor for damages. Extensive case law has
shaped the permissible content of this agreement between creditor and debtor. It allows for all
features of the IT non-possessory pledge to be agreed between the parties. For claims,
correspondingly, a full assignment by way of security (Sicherungsabtretung) exists and in
practice has all but replaced the pledge over claims, for similar reasons.
Greece
Source of information: SSM report
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The Bank of Greece has indicated that there is no legal framework for rapid out-of-
court collateral enforcement. Collateral enforcement and foreclosure measures in broader
terms were generally unfavourable in Greece, mainly because of the super-seniority of State
claims (tax, social security, etc.) compared with all other creditors’ claims in in-court
proceedings. Therefore, banks had little incentive to proceed with collateral enforcement and
liquidation. As part of the August 2015 MoU obligations, Law No 4335/20159 was adopted,
significantly reducing the seniority of public claims. In particular, under the new Law, at least
65% of the proceeds from collateral liquidation are paid to secured creditors.
Further reforms have been introduced by the aforementioned law in order to tackle the issue
of the lengthy foreclosure and collateral enforcement procedures. The average length of a
foreclosure procedure is 18 months, or even longer for full execution. These reforms refer
mainly to the reduction of impediments to enforcement actions, limiting the number of
appeals against court decisions and setting shorter deadlines for the completion of the whole
process.
Hungary
Source of information: K&L Study on Secured Transactions
Scope (contractual parties of the loan)
Categories of assets used as collateral: movable assets (such as raw material supply,
stock,accessories)
Scope (type of security rights): not clear
Type of enforcement procedure: sale
Any other relevant information
On 15 March 2014 the new Hungarian Civil Code (Act V of 2013 on the Civil Code) came
into force in Hungary which allows for extrajudicial enforcement.
Prohibition of security agreements with a fiduciary element
The most important change in connection with the regulation of collateral security was the
prohibition of transfer of ownership, right to purchase and assignment for security purposes
(according to Section 6:99 of the Civil Code: “Any clause on the transfer of ownership,
other right or claim for the purpose of security of a pecuniary claim, or on the right to
purchase, with the exception of the collateral arrangements provided for in the directive on
financial collateral arrangements, shall be null and void.”). A common feature of these
securities was that they could be enforced by creditors simply and easily, but they did
gu h d b ’ . Debtors had very little chance to
check, and the creditors could gain ownership of the asset securing the collateral during
enforcement. This provided numerous opportunities for creditors to abuse the confidence of
debtors. However, there are three exceptions to the nullity of fiduciary collateral arrangements
listed in the Civil Code: factoring, financial lease and retention of title.
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Although the concept of charge over financial assets (i.e. floating charge) has been dismissed
by the new Civil Code, it seems that it might be possible to still enforce it out-of-court.
Ireland
Source of information:
Scope (contractual parties of the loan): Not clear if broader than banks and companies and
entrepreneurs
Categories of assets used as collateral: moveable and immovable
Scope (type of security rights): fixed charges, mortgages
Type of enforcement procedure
The most common methods of enforcing security under Irish law are: (i) the appointment of a
receiver; and (ii) the power of sale conferred on mortgagees. Private sale.
Procedural steps
Appointment of Receiver
Receivership is a contractual remedy for the enforcement of security and court approval is not
required. For the enforcement of all forms of fixed charge, either a receiver is appointed
pursuant to the terms of the charge deed or the chargeholder becomes a mortgagee in
possession of the charged asset.
A receiver has an obligation to obtain the best price for the secured assets so a receiver in a
pre-pack will require a significant level of comfort as to the market value of the assets which
he will be asked to sell within hours/days of its appointment. A prudent receiver will require
evidence of market testing and an independent valuation. The extent of the evidence which
can be produced to a proposed receiver to provide comfort that the proposed price represents
market value will be case specific.
Mortgagee in Possession
A legal mortgagee has a right to take possession of a property secured in its favour and
to sell it. The power of a security holder to go into possession and sell derives from statute
and also from the security document. A security document would typically include a clause
providing that all of the powers conferred upon a receiver under the security document may
be exercised by the security holder directly.
As with the duty of a receiver, if a security holder moves to sell an asset in this manner it is
under a duty to obtain the best price reasonably available at the time of sale. Normally a
security holder would obtain professional advice from an estate agent or valuer as to: (i) the
method and timing of sale; (ii) the price to be obtained; and (iii) any steps that should be taken
prior to marketing the property.
Other information: an independent valuation is needed.
Italy
Source of information: Ministry of Justice response and Latham and Watkins
Scope
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Decree Law No. 59/2016 (the so-called “Banks Decree,” hereinafter the Decree) published in
the Official Gazette (the Decree was later amended and converted into law by Law No.
119/2016) and entered into force in June 2017 introduced two important novelties:
1. A new type of security right (floating charge) over movables
2. New Repossession agreements on real estate assets (other than the main residence of
the relevant entrepreneurs or their affiliates)
1)The Floating Charge may be granted over non-registered movable assets that relate to
the business activity, in order to secure existing as well as future claims (to the extent certain
or determinable, provided that a fixed maximum guaranteed amount shall be explicitly
indicated in the relevant agreement) relating to the same business activity. In particular, the
Floating Charge may be granted over existing and future assets, to the extent certain or
determinable, also by way of reference to a specific kind of asset or to a global value. Subject
to any contrary provision in the relevant deed of charge, the pledgor may transform or dispose
of the charged assets. The Decree introduces the Italian floating charge regulation (pegno
non-possessorio, hereinafter the Floating Charge), a new type of security. The main
differences between the new Floating Charge and the Italian pledge (pegno) provided by
Articles 2784 and ff. of the Italian Civil Code (the Italian Pledge) are the following: (i)
pursuant to Article 2786 of the Italian Civil Code, to perfect an Italian Pledge the pledgor
shall be dispossessed of the charged assets; (ii) on the contrary, the Floating Charge may be
granted over assets which remain in possession of the pledgor, and thus the same asset
may continue to be used by the pledgor.
2) Real estate assets (other than the main residence of the relevant entrepreneurs or
their affiliates) may be subject to repossession agreements (known also as Patto
Marciano).
The Decree, as amended by Law No. 119/2016, allows the secured creditor(s) to repossess the
relevant assets only in the event of non-payment for a period of more than nine months,
starting from the maturity of three installments (may be non-consecutive). The period
increases to 12 months in the event that, at the date of the first non-payment, the debtor has
already paid at least 85% of the relevant financing agreement. The repossession agreement
may be included both in new financing agreements and in agreements already existing at the
date on which the Decree entered into force. In the latter scenario, the parties shall insert the
repossession agreement by amending the financing agreement, in the form of a notarial deed.
Where the facility is already drawn and secured by a mortgage, the repossession of the
charged asset, conditioned upon the non-payment, shall prevail over any registration
(trascrizione or iscrizione) subsequent to the original mortgage registration. Therefore, any
security — including any mortgage — which is registered after the original mortgage, ranks
lower than the repossession agreement.
Type of enforcement procedure
1) The Law Decree introduces an enforcement system where the new non-possessory pledge
is substantially driven by the secured creditor, whereas the involvement of the court becomes
residual. Court involvement would be necessary only in case of challenges/opposition in the
enforcement methods used by the creditor or where the debtor does not cooperate in the
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enforcement and assistance of the public force is therefore required. Indeed in order to enforce
the pledge the secured creditor may:
 Sell the collateral, satisfying certain claims on the proceeds up to the value of the
secured obligations and transferring to the pledgor any exceeding amount. The assets
shall be sold through competitive procedures, also with the assistance of specialized
operators, on the basis of the value assessed by experts. The selling procedure shall be
adequately publicized, including, in any case, the publication on the Ministry of
Justice’s (Ministero della Giustizia) website, pursuant to Article 490 of the Italian
Code of Civil Procedure.
 Enforce the receivables which have been granted as collateral.
 To the extent provided under the relevant registered Deed of Charge, lease the assets
in accordance with the criteria (including as to income deriving from the lease)
specified therein and retain the relevant income up to the value of the secured
obligations.
 To the extent provided under the relevant registered Deed of Charge (which shall also
provide the criteria for the valuation of the assets and of the secured obligations), seize
the collateral up to the value of the secured obligations.
The Decree further provides that in case of a debtor’s bankruptcy, the Floating Charge may be
enforced upon admission of the relevant secured obligations with priority to the bankruptcy
real estate (ammissione al passivo con prelazione) and, differently from the Italian Pledge,
further to the admission, the secured creditors may dispose of the collateral without court
authorization.
2) In case of repossession agreements, the relevant creditor shall notify the debtor or, if
different, the owner of the relevant assets, of the relevant creditor’s intention to enforce the
repossession clause. Following 60 days from such notice, an independent expert
appointed by the competent court, shall assess the value of the relevant assets and notify
the creditor, the debtor or, if different, the owner the relevant assets of the its certified
report/assessment. If the debtor raises any objection to the expert’s valuation, such objection
shall only affect the differential amount to be paid to the debtor and not the creditor’s right to
enforce the repossession clause.
Latvia
Source of information: Ministry of Justice response
Scope (contractual parties of the loan)
Broader than banks and companies. It includes any secured creditors. a pledgor may be even
any natural person if the pledged property is expressly mentioned in the Commercial Pledge
Act (vehicles, boats, planes, shares, bonds, intellectual property and herd).
Categories of assets used as collateral: Only movable assets, not immovable ones.
Scope (type of security rights): Only for commercial pledges. Thus possessory pledges and
usufructuary pledges are excluded (because in these cases there's no out-of-court enforcement
because the possession of the property is transferred to the creditor).
Type of enforcement: Sale, but not clear if public or private sale
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Any other relevant information
As a rule, the court decision on the initiation of a restructuring procedure suspends the
creditor's right to use out-of-court procedure.
A pledgee of a commercial pledge may demand the settlement of a claim out of property
encumbered with a commercial pledge even if the claim has not fallen due if the legal
protection proceedings (restructuring) or insolvency process begins for the pledgor. However,
extrajudicial mechanisms for the enforcement of secured loans by a commercial pledge are
very restricted in such cases. But only if the prohibition of the sale causes significant harm to
the interests of the creditor (including the existence of the threat of the destruction of the
pledged property, or the value of the pledged property has reduced significantly). The
decision to permit the sale of the pledged property of the debtor is taken by the court.
Lithuania
Source of information: Deloitte study
Scope (contractual parties of the loan): Not clear if broader than banks and companies and
entrepreneurs
Categories of assets used as collateral: moveable and immovable assets
Scope (type of security rights): pledges and mortgages
Type of enforcement procedure: Not clear if public or private sale
Procedural steps: Sale through notary.
Any other relevant information : right to challenge by security provider
Average time and costs for out-of-court collateral enforcement: Minimum 4 to 5 months if no
challenges otherwise it may take significantly longer. For challenges the laws provide for
short procedural terms (20 days for complaint submission, 7 days for filing an appeal against
the decision).
Luxembourg
Source of information: Deloitte, K&L
Scope (contractual parties of the loan)
Not clear if the scope is broader than banks and companies and entrepreneurs.
Categories of assets used as collateral: moveable and immovable
Scope (type of security rights)
Commercial pledges, but a minimum court involvement is needed.Mortgages under certain
conditions.
Type of enforcement procedure: public auction
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Procedural steps
Commercial pledges may be enforced by the pledgee who is already in possession of the
pledged asset, and after serving a summons to pay upon the pledgor, by seeking a court
decision. The court decision fixes the conditions of the sale of the pledged asset by public
auction.
For pledges over general business, upon the default of the debtor, the pledgee must notify
(mise en demeure) the pledgor and attach the pledged assets without a judicial order. Then,
the pledgee must request an authorisation from the President of the relevant District
Court to sell the pledged assets, in whole or in part. The sale will be done by an official
appointed by the President of the District Court. The court order will be enforceable against
the pledgor upon its service by a bailiff.
As regards the transfer of ownership as security, upon the default of the debtor, the creditor
(transferee) shall be released from its obligation to transfer back the transferred assets to the
transferor, until full satisfaction of the secured obligation. The transferee will have the right to
exercise all rights in respect of the transferred assets. Transferee may set off the remaining
debt of the transferor against the transferred assets, without further notice.
After the set off, the transferor should return any remaining transferred assets to the
transferee.
Average time and costs for out-of-court collateral enforcement
6 months for pledges if a court order is required which is the case all the time (the only
exception is for financial collateral). If challenged by debtor- 1 year.
If the mortgage deed contained a specific clause (clause de voie parée) allowing the
mortgagee to sell the real estate through a notary without complying with the legal
requirements for the attachment procedure, the public auction may occur approx. 1 month
after the summons to pay.
Malta
Source of information: SSM report
No legal measures have been introduced to enable the rapid out-of-court enforcement of
collateral
The Netherlands
Source of information: SSM report, Deloitte
Scope (contractual parties of the loan)
All contractual parties are eligible.
Categories of assets used as collateral
Movable or immovable assets can be used as collateral, including primary residence assets.
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Scope (type of security rights)
Pledges, mortgages, retention of title.
Existence of private sale, auction and appropriation methods
Public sale with the involvement of a public notary is available. Private sale is available, but
requires a court authorisation.
Procedural steps
Debtor has no possibility to challenge property-law security rights.
Any other relevant information
Secured creditors can enforce their right in bankruptcy, except if a court suspends the
enforcement of security rights against the debtor.
Average time and costs for out-of-court collateral enforcement
Enforcement of security rights can be immediate.
Poland
Source of information: Ministry of Justice, expert group, Deloitte, K&L.
Scope (contractual parties of the loan)
All contractual parties are eligible. In practice, the instrument is mostly used for loans
originated by credit institutions.
Categories of assets used as collateral
Extrajudicial enforcement is possible only on movable assets subject to a registered pledge
(excluding ships).
Scope (type of security rights)
Registered pledge. Other securities can be enforced out-of-court only if the debtor has signed
a notarial deed of submission to enforcement.
Existence of private sale, auction and appropriation methods
Appropriation and public sale by a public notary are foreseen for registered pledges.
Procedural steps
The pledgor has to notify the pledgee about its intention to enforce the security right, opening
a 7-day period for satisfying the claim or appealing to the court. After that period, the pledger
has to transfer ownership of the asset.
Any other relevant information
Enforcement of security right is in general suspended in insolvency.
The security and the rights to enforcement can be transferred, if the transfer of security is
properly registered.
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Average time and costs for out-of-court collateral enforcement
The time depends on many factors, in particular the reaction of the pledgor. In the best case,
the procedure can take a couple of weeks.
Portugal
Source of information: SSM report, KL Gates
Scope (contractual parties of the loan)
All contractual parties are eligible.
Categories of assets used as collateral
Extrajudicial enforcement is possible only on movable assets subject to a pledge, if agreed by
parties in the contract.
Scope (type of security rights)
Pledge
Existence of private sale, auction and appropriation methods
Private sale is the only method.
Any other relevant information
There is an obligation to sell pledged assets at their fair market value, which in practice
pushes the creditor to obtain a credible valuation of assets prior to the sale. The creditor
cannot become the acquirer of pledged assets.
Romania
Source of information: EBRD, Deloitte, K&L Gates
Scope (contractual parties of the loan)
All contractual parties are eligible.
Categories of assets used as collateral
Extrajudicial enforcement is possible only on movable assets. There is a legal gap on
intangible movable assets (such as pledged shares),
Scope (type of security rights)
Mortgage of movable assets.
Existence of private sale, auction and appropriation methods
Public sale and private sale are available for parties to be chosen in the mortgage contract.
Appropriation is possible if debtor has given consent to it following the default, and if
concerned parties were notified.
Procedural steps
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The law imposes notification rules to debtor and third parties.
Any other relevant information
Obligation to perform the sale on commercially reasonable terms (usual commercial practices
if regulated market, or following rules defined in the mortgage contract if no standard
market).
Slovakia
Source of information: Ministry of Justice
Scope (contractual parties of the loan)
All contractual parties are eligible.
Categories of assets used as collateral
All types of immovable and movable assets.
Scope (type of security rights)
Pledges of immovable and movable assets.
Existence of private sale, auction and appropriation methods
Enforcement method to be agreed in the contract (private sale, direct sale by agent, private
tender). All methods except the private sale require an enforcement title (court order or
notarial deed agreed by debtor in default).
Procedural steps
a secured creditor has to inform the debtor (and the collateral owner, if he is a different
person), that the collateral will be realized as well as about the way of realization. As
mentioned, the collateral may be realized
- by way stipulated in the contract or
- by selling the pledge at a voluntary auction, or
- by enforcement (here a court judgment is necessary).
The announcement has to be done in written form to the owner of the collateral 30 days prior
to the start of realization. The creditor has also to inform the registry where the pledge is
registered. Generally all collaterals are registered in a registry, although there is not one
centralized registry for all collaterals. There is however a centralized registry of voluntary
auctions102
. After stipulated period during which the debtor is not entitled to dispose of the
collateral, the secured creditor may start the realization and he acts in the name of the
collateral owner. The collateral possessor has an obligation to cooperate.
Sale by way stipulated in the contract
102
http://www.notar.sk/%C3%9Avod/Not%C3%A1rskecentr%C3%A1lneregistre/Dobrovo%C4%BEn%C3%A9dra%C5%BEby.aspx
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There are specific stipulations about sale of collateral by way stipulated in the contract which
aim at protection of the debtor. Mainly the secured creditor has to sell the collateral with due
care and for usual price, a written report about the process of sale must be sent to the
collateral owner and the value of proceeds and costs of sale (these are to be borne by the
collateral owner) have to be proven by the secured creditor.
Voluntary auction
Sale by the way of voluntary auction is regulated in a separate Act. It is usually used for
realization of immovable by the collateral creditors. These are usually banks or building
administrators (for block of flats) because in Slovakia a statutory secured right (with the flat
as a collateral) arises if the flat owner does not settle payment connected with the use of a flat
or payments connected with the house. The description of the voluntary auction process is
given mainly to the sale of immovable as it tends to be common and has specific safeguards.
However the vast majority of this process is identical (or less stringent) for other types of
collateral as well.
Enforcement via voluntary auction sale offers twofold safeguards for the collateral owner
(debtor, here we presume that it is the same person) – before and during the process of sale
and after the sale.
The first type of safeguards include said written announcement to the owner 30 days prior to
the start of realization, on-line publishing of auction, low cost for attendance of the auction
(an entrance fee is maximum 3,32 Euro, apart from the duty to make a deposit if the person
wants to bid), ban for certain persons to bid at the auction (connected parties to the auctioneer
but also to the debtor), assessment of the value of the collateral (for more valuable collaterals)
by expert opinion, possibility of the debtor to challenge the expert opinion on the value of
collateral, possibility of repeated auction, obligatory control by notary public in case of
auctions on immovable, limiting the lowest bid (specifically if the debtor has his
administratively registered residence in the immovable). However, compared to the court
enforcement, the auction is not approved by the court.
The second type of safeguards is the general possibility of the owner to challenge the auction
within 3 months after the auction at the court and claim that the enforcement contract had
been invalid. Article 39a of the Civil Code on usury available only for consumers broadens
conditions of invalidity of contracts for misuse to legal acts made under distress, inexperience,
recklessness etc. providing that mutual contractual settlement is grossly imbalanced. In
exceptional cases a natural person (whether a consumer or a sole trader) may challenge the
auction even after the passing of the 3 months period. This exceptional form of protection can
only be applied if three conditions are fulfilled at the same time – the reasons for invalidity of
auction are connected to a criminal offence, the object of the auction in question is an
immovable and the immovable is the administratively registered residence of the debtor. Such
legal provisions were introduced on the basis of long-term abuse of the weaker contracting
party in financial services where the consumers often had to pay disproportionate payback for
loaned financial means. The abuse of the auction system was done via unduly diminished
price of immovable at the auction and restricted access to consumers´ personal items
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including their documents which often led to passing the 3 months period for filing the
challenge action.
The process of auction of immovable entails the following steps (in given order)
- said general written announcement of the enforcement creditor to the debtor
- conclusion of a contract of the enforcement creditor with the auctioneer
- communication with the collateral owner
- online publication of information about the auction
- drawing up the expertise opinion or expertise assessment (in case of lack of
cooperation with the owner) on the value of collateral
- setting the place and date of auction, dates of inspection of immovable
- 2 inspections
- auction
- drawing up a notary report
- publishing the result of the action
- handing the immovable over
The process of auction cannot be launched for collateral in form of immovable if the value of
the secured debt (without accessories) is lower than 2 000,- Euro. This principle mirrors the
principle in the Act on judicial enforcement pursuant to which it is not possible to sell an
immovable for minor debt. Again, this protection was introduced on the basis of abuse of the
system mainly to the detriment of consumers.
Any other relevant information
Ministry of Justice pointed out to frequent experience of abuse which led to many legislative
changes and protection of consumers in exceptional cases. There are some specific rules
concerning the protection of consumers in ensuring conveyance of a right as well as income
deduction, which we are willing describe in detail if required.
There was especially abuse of consumers by debt collectors. These often try to enforce the
debts from consumers on behalf of secured creditor before the actual sale of collateral and
they unduly interfere in consumers´ rights. Therefore a specific clause was introduced in the
Act on protection of consumers which is comprised of limiting the costs for debt collection
that can be enforced from the debtor (consumer) to the amount of the actual loan. Also debt
collecting companies cannot personally visit the debtor at work or in his household and during
specifically stipulated times and dates (after 6 p.m., during national holidays etc.).
Obligation of sale with due care, and in usual conditions.
Link to insolvency
In general, at some stage of insolvency or discharge procedure the extrajudicial enforcement
mechanism is discontinued and the insolvency practitioner handles the use and sale of the
collateral. However there are some exceptions, namely for voluntary auctions. In Bankruptcy
the discontinuity comes with at the moment of declaration of bankruptcy which is a third (and
main) stage of bankruptcy proceeding (Filing a motion to the court – opening a bankruptcy
proceeding and examination of the conditions by the court – declaration of a bankruptcy over
the debtor by the court). If prior to the declaration of bankruptcy an item in auction is
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adjudicated and this item is liable to the bankruptcy and the adjudicataire has paid to the
auctioneer the highest bid, the ownership title and the other rights to the item in auction shall
pass over to the adjudicataire. The proceeds of the auction shall become an integral part of the
relevant bankruptcy estate and the expenses of the auction shall become a claim against the
relevant bankruptcy estate; if the auction is organized upon motion of a creditor holding a
secured debt, the proceeds shall be paid to the creditor holding the secured debt up to the
amount of its secured debt, as if no bankruptcy order were made.
However, if prior to the declaration of bankruptcy the auction has not started, the auction shall
be refrained from. The loan is then treated as a classic secured loan in bankruptcy.
In restructuring the auction can take place if it started before the restructuring was authorized
by the court. Once the authorization was given and the auction has not started, the auction
shall be refrained from.
In a discharge of natural person by bankruptcy the position of a secured creditor is stronger. A
secured creditor is entitled to choose whether or not he will file the debt to the procedure and
whether such asset will actually become a part of discharge estate. If the secured creditor does
not file the secured debt, such debt will not be influenced by the discharge procedure at all
and its enforcement may start or continue without interruption. If the secured creditor decides
to file his secured debt in a discharge procedure, in general the auction, if initiated by the
secured creditor, will be discontinued. However, the secured creditor may later decide to
enforce (via voluntary auction or otherwise) the collateral on his own and not within the
discharge procedure. Also, there are specific rules on cases where there is more than one
secured creditor, where only some of them filed their claims or where the value of the asset is
higher than the secured claim(s).
The discharge of natural person by repayment plan does not influence the enforcement of the
collateral except for one (but important) situation, namely a protection of debtor´s residence.
If such residence is to be sold via a voluntary auction, the debtor has right to ask the
auctioneer for a postponement of the auction once the stay of claims had been granted. Such
postponement shall last for 6 months.
Slovenia
Source of information: SSM report, EBRD, Deloitte
Scope (contractual parties of the loan)
All contractual parties are eligible.
Categories of assets used as collateral
Immovable and movable assets.
Scope (type of security rights)
Mortgages on immovable assets, liens on movable assets and rights
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Spain
Source of information: expert group
Scope (contractual parties of the loan)
All contractual parties are eligible (except for special security rights limited to corporates,
such as floating charges) to agree contractually on an extrajudicial enforcement procedure.
Categories of assets used as collateral
Immovable and movable assets.
Scope (type of security rights)
Mortgages and pledges.
Existence of private sale, auction and appropriation methods
Extrajudicial notary auction is the only method available, and uses an online auction.
Appropriation and private sale prohibited.
Procedural steps
Mandatory notification period, as agreed by contract or, by default, 10 days. Thereafter, a
certificate issued by the creditor setting out the amounts claimed constitutes sufficient
evidence of a claim, and includes interest, costs and expenses, fees and any other amounts
accrued or to be accrued until the date of enforcement. Notarial auctions take place in the
official online portal, must be officially announced at least 24 hours in advance and last at
least 20 days.
Any other relevant information
Appropriation by creditor authorised if no bidders in two attempted auctions, provided that
the whole claim is written off. Creditor can participate in auction if other bidders present.
Average time and costs for out-of-court collateral enforcement
Under normal circumstances 2-3 months.
Sweden
Source of information: Thomson Reuters Practical Law, International Comparative Legal
Guide
Scope (contractual parties of the loan)
No explicit limitation of contractual parties.
Categories of assets used as collateral
Movable assets.
Scope (type of security rights)
In general, possessory pledge is required for tangible movable assets. Non-possessory or
registered pledge is possible for some tangible movable assets (e.g. aircraft and ships),
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financial assets (dematerialised shares, receivables), and intangible assets (intellectual
property).
Mortgages and floating charges require an enforcement title (e.g. judgment, arbitrage award)
and are enforced through the Swedish enforcement body. They are subject to a stamp duty at
creation of respectively 2% and 1% of face value.
Existence of private sale, auction and appropriation methods
The pledge agreement can freely define the enforcement method, generally either a public or
private sale.
Procedural steps
Perfection of a pledge is specific for each asset type.
Any other relevant information
Creditor has the obligation of a duty of care in enforcement, and must look after the interest of
the pledgor.
Bankruptcy suspends any individual enforcement action, except in the case of a possessory
pledge which can be enforced through a public auction.
The United Kingdom
Source of information: Ministry of Justice response
Scope (contractual parties of the loan)
All contractual parties are eligible.
Categories of assets used as collateral
All types of assets can be subject to extrajudicial enforcement.
Scope (type of security rights)
Legal mortgages, equitable mortgages, charges, possessory pledges.
Existence of private sale, auction and appropriation methods
Extrajudicial appropriation possible for mortgages and charges, provided that the security
contract stipulates this right or is made by deed, and the mortgagor/chargor voluntarily
surrenders possession. Power of sale is available for mortgages, charges and pledges,
provided that the security contract stipulates this right or is made by deed.
Appointment of receiver is a commonly used extrajudicial method available for legal
mortgages and fixed charges, provided that the security contract stipulates this method.
Secured creditors holding a floating charge over substantially all of the debtor's assets can
appoint an administrator without court intervention, which is also a common enforcement
method.
Procedural steps
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The loan agreement can freely define events of default, which lead to the acceleration of the
repayment obligation. The security defines the event that enables enforcement of the security.
Different notification rules on enforcement apply to the various methods.
Any other relevant information
Security provider has several possibilities of appeal against enforcement, by contesting the
existence of debt, the fact that it was due, by questioning the perfection of the security, or by
contesting the documentation and notice requirements.
Mortgagee in possession is exposed to third party liabilities (e.g. environmental liabilities,
other duties).
Individual enforcement by secured creditors is suspended automatically in administration and
in compulsory liquidation.
Average time and costs for out-of-court collateral enforcement (if available)
Appropriation can be effective in a couple of days, if there is voluntary surrender by the
chargor, but can last between 2 to 9 months if court intervention is needed.
128
Annex 6 – Impacts of the policy options – detailed description
Option 1 – Pros and cons
Pros:
 Promoting existing international harmonisation initiatives of extrajudicial collateral
enforcement procedures, or national procedures/features of enforcement mechanisms
which work well through a soft law approach. Member States could be made aware of
the benefits that having such systems in place would bring benefits both domestically
and on a cross-border basis. and would decide to implement the best practices in their
systems
 Could incentivise Member States to implement those recommendations. A non-
binding instrument would leave the highest degree of discretion to Member States as
regards the ways in which they could implement the recommendations hence
minimising the implementation cost. This also avoids possible disruptions of national
regimes that work well.
 Administrative costs for public authorities might decrease, given that the cost of out-
of-court enforcement procedure would be undertaken by private parties, secured
creditors and companies/entrepreneurs. The secured creditor would have to advance
the cost of the procedure but the final cost would be undertaken by the
company/entrepreneur in default, which is similar to the pre-insolvency and
insolvency procedure. This means that the intervention of any public authority in the
enforcement process, such as notary or bailiff, would be at the expense of the parties.
Cons:
 Given the non-binding nature of the recommendation, the highest risk is that Member
States choose to ignore it. Member States with no system in place could choose to stay
without. Member States with inefficient systems could choose not to change them.
 Considering that option 1 is based on voluntary harmonisation, even if Member States
would choose to adjust their national framework by following the recommendations
which would be set at EU level, there is a high risk that the implementation of those
recommendations would not fully achieve the policy objectives. For example, where
Member States would introduce changes to their legal framework, they might only do
so by taking into account the national perspective. As a result, this could lead to
heterogeneity of approaches which will continue to inhibit cross-border collateral
enforcement and lending, and will continue exposing banks to a higher risk of
accumulation of NPLs. The absence of a consistent and predictable EU-wide
framework would continue to create a considerable layer of uncertainty and increase
costs of enforcement cross-border. Banks would not benefit from a level-playing field
as regards their ability to enforce collateral out-of-court.
Option 1 – Stakeholders impacts
129
Corporate (including entrepreneurs and SME) as borrowers
Positive direct103
impact:
 Borrowing costs for business borrowers are expected to decrease as banks with an
effective, expedite way to enforce their collateral can expect both a lower probability
of default (since debtor's moral hazard is reduced) and a lower loss given default (as
the collateral value will not diminish due to lengthy court procedures). With reduced
risks, banks will adjust their pricing accordingly (i.e. downwards). Moreover thanks to
the reduction of risks explained above (especially the lower loss given default) more
projects which were not able to get financing previously would now become
financeable again. As a result secured lending and overall the supply of finance is
expected to increase. The last two points are especially true for SMEs rather than
corporates as the latter can also finance themselves through the capital markets (i.e.
issue bonds) whereas the former are heavily reliant on bank financing. However, given
the uncertainties related to the take up of recommendation the benefits are expected to
be quite marginal: a quantification work carried out by the Commission services (see
annex 4) indeed shows that the long term annual savings for borrowers for option 1 are
estimated between EUR123M and EUR219M. This means a reduction of borrowing
costs estimated between 2 and 4 basis points.
Negative direct impacts104
:
 Companies in financial difficulties and with an unsustainable business model will see
their collateral enforced and sold/taken away quicker. The company might cease to
operate in case of enforcement of the main productive assets which will however be
recycled for a more productive use (hence resulting in a net societal/macroeconomic
gain).
Secured creditors including investors
Positive direct105
impacts:
 The formalities, time delays and costs typically associated with a court enforcement
process can be reduced for banks operating in those Member States following the
recommendation and hence being able to enforce the collateral more quickly and
cheaply out of court. This is expected to increase the recovery rates on defaulted
secured loans. Given the uncertainties related to the take up of recommendation, the
benefits are expected to be quite marginal: a quantification work carried out by the
Commission services (see annex 4) indeed shows that the extra amount recovered by
banks in a simulated future NPL crises is estimated at 0.6% compared to the baseline
103
A positive indirect impact would be that, given that banks would be equipped with an effective and speedy
tool to enforce the collateral, this could work as default deterrent for the borrowers.
104
A negative indirect impact would be that although the mechanism is voluntary and will have to be agreed
upon by both parties in the loan contract, the negotiation power of businesses especially SME to include or not
such mechanism will be limited. This increases the need for safeguards for debtor (see social impacts).
105
A positive direct impact would be that the probability of default might decrease for secured loans given that
debtor moral hazard will be reduced: as debtors might be well aware that the collateral will be easily and quickly
enforced they will be more incentivised to pay their loans in a timely manner. However, even if the borrower is
willing to pay, its actual ability to do so depends also on external factors.
130
(with average recovery rate expected to increase to 70% from the current estimated
level of 68%). The extra recovered amount by banks is estimated at EUR2billion.
 The recommendation (if followed up) might provide more transparency and certainty
to secured creditors as regards the enforcement process relating to defaulted loans
across the EU. This should contribute to reducing (albeit marginally) the build-up of
NPLs and thus would somewhat encourage lending especially domestically as the low
degree of harmonization expected would still not facilitate more cross-border lending
(as legal and research costs that banks and secured creditors incurred when enforcing
collateral cross-border would not be reduced).
 [Third party investors] The increased recovery rates will improve the conditions for
banks to tackle NPLs directly or to sell (at higher price) to third party NPL investors.
This would reduce (albeit marginally) the bid/ask spreads explained in the problem
definition from the demand (i.e. divesting banks) side especially domestically.
Moreover, the low degree of harmonization achieved with a recommendation would
only marginally facilitate the creation of pan-European NPLs investors which would
not be able to fully reap the benefits of the Single Market. The bid/ask spreads
explained in the problem definition from the supply (i.e. NPLs companies) side might
be reduced (albeit marginally).
Negative impacts106
:
 Increased reputational risk for banks which arises from the enforcement of collateral
through an out-of-court mechanism.
Other commercial creditors (unsecured creditors, junior creditors, suppliers, etc..)
Positive indirect impacts:
 The underlying assumption is that collateral disposal price will be maximised through
an expedited out-of-court mechanism governed by clear rules. This should in principle
allow for a better satisfaction of secured creditors than it is the case today by enabling
those creditors to recover full value (hence the increased recovery rates as explained
above). By maximising value recovery, it is expected that this would also contribute
indirectly to increasing the estate of the borrower in cases where the borrower would
be subject to a restructuring or insolvency proceeding after the out-of-court
mechanism is used. However, this would depend on a case by case basis, on the
amount which is recovered through the use of the out-of-court mechanism.
Negative impacts:
106
Another negative but not significant impact for secured creditors is that they will have to bear the costs
related to out-of-court collateral enforcement in a first stage. However those costs would be recouped from the
borrower once the collateral is enforced. The costs associated with out-of-court enforcement would however not
be significant for banks because they would mainly consist in costs related to the notification of the borrower in
case of default, possibly a second notification on the use of the out-of-court mechanism (if a second notification
is needed; this depends on national legislation), and the fees that need to be paid to either an authority which
would be involved in the enforcement process, such as a notary or a bailiff, or costs charged by an expert, in case
a valuation of the collateral is needed (in case of enforcement through the appropriation mechanism).
131
 If the out-of-court mechanism is "overused" (not only on companies with an
unsustainable business but also on companies with a sustainable business model), this
might prevent finding a deal for saving the business. Also this could be negative for
the suppliers of that corporate borrower which are likely to lose their commercial
relationship with that borrower earlier than this would have happened, should the out-
of-court enforcement mechanism not have been used. However triggering an out-of-
court procedure will be on a case by case as it could also be that the banks prefer in
certain occasions the business to be restructured rather than being put into insolvency
as a restructured business has the potential of benefiting of banks loans in the future.
Member states (competent authorities and public creditors):
Positive direct impacts:
 The positive impacts for business and secured creditors alike as described in details
above would increase the general economic sentiment in a given Member State.
 More cases will be dealt out-of-court and this would free up courts resources and
capacities to deal with other types, more complex cases (i.e. insolvency and
restructuring cases)107
. Moreover as the costs associated with the out-of-court
procedures would mainly be borne by banks and companies, and not by the taxpayers
as it is the case today for judicial enforcements of collateral, this could bring some
cost savings for the public administration.
 Equipping banks with better tools with dealing with their non-performing loans would
bring about financial stability benefits. If the build-up of future NPLs is avoided or
contained, supervisors would have more time and resources to dedicate to other
supervisory activities. The recommendation would not change the ranking of creditors
in an insolvency proceeding and as such potential super-seniority of public debt under
national laws would be unaffected by it.
Negative impacts:
 Implementation costs incurred by public authorities linked to change of the law
following the recommendation. However these are expected to be quite minimal.
Option 2 – pros and cons
Pros:
 The harmonisation of key features of an extrajudicial enforcement procedure would
ensure expedited and effective extrajudicial enforcement procedures across the EU.
This could be done by building on well-functioning systems. A common set of key
principles and rules would contribute to ensuring a level-playing field for banks across
the EU and increase certainty for the banks as regards their ability to recover value
from collateral in a similar way in all Member States. By reducing the number of court
cases related to collateral enforcement, this option should decrease the cost of
enforcing collateral by avoiding fees related to often complex and lengthy judicial
107
The possible decrease of court cases would also depend on the number of appeals against the out-of-court enforcement procedures.
132
procedures. In a cross-border context, this option would provide more legal certainty
and would decrease legal and research costs.
 This option would provide flexibility to Member States as regards the implementation
of the accelerated enforcement procedure into national frameworks while establishing
a common set of rules. For example, the choice of security rights in relation to which
the AECE could be used, publicity requirements, detailed provision as regards the
enforcement procedure, etc. would be left to Member States' discretion. This should
minimise the implementation costs required by the directive.
 It would minimise impact on Member States' private and public laws. This is in
particular important for Member States which have already established such
procedures. For example, it would not impact the ranking of creditors because this
option would not lead to establishing a new security right (as opposed to option 3), but
would only provide for an enforcement mechanism which could be used in relation to
existing security rights in the Member State.
 Administrative costs for public authorities might decrease, given that the cost of out-
of-court enforcement procedure would be undertaken by private parties, secured
creditors and companies/entrepreneurs. The secured creditor would have to advance
the cost of the procedure but the final cost would be undertaken by the
company/entrepreneur in default, which is similar to the pre-insolvency and
insolvency procedure. This means that the intervention of any public authority in the
enforcement process, such as notary or bailiff, would be at the expense of the parties.
Cons:
 Member States may implement the rules in divergent ways, given the discretion which
is left to them on a number of areas108
. The level of divergence is however lower
compared to option 1.
 This option would not create the highest level of effectiveness and legal certainty as
regards out-of-court collateral enforcement procedures, as opposed to option 3 which
would consist in full harmonisation. Nevertheless, the great variety of features of
Member States' private and public laws require a certain level of flexibility for
Member States to implement an EU framework on out-of-court enforcement to enable
them to apply it in a suitable fashion. A minimum harmonisation framework would
enable Member States to use the most appropriate means to make AECE work in their
national systems. In particular, given the strong interlinks between collateral
enforcement and pre-insolvency and insolvency rules, a margin of discretion is needed
so that AECE fits with those national systems. The proposal on preventative
restructuring and second chance frameworks which the Commission has presented in
November 2016 is a minimum harmonisation directive. The interlinks of preventative
restructuring and second chance with national private laws and insolvency systems has
been a key consideration in envisaging a minimum harmonisation directive which
would allow Member States to decide upon the specific means by which that proposal
would be implemented to make it compatible with national frameworks.
133
Option 2 – stakeholders' impacts
Corporate (including entrepreneurs and SME) as borrowers
Positive direct109
impact:
 Borrowing costs for business borrowers are expected to decrease as banks with AECE
(i.e. an effective, expedite way to enforce their collateral) can expect both a lower
probability of default (since debtor's moral hazard is reduced) and a lower loss given
default (as the collateral value will not diminish due to lengthy court procedures).
With reduced risks, banks will adjust their pricing accordingly (i.e. downwards).
Moreover thanks to the reduction of risks explained above (especially the lower loss
given default) more projects which were not able to get financing previously would
now become financeable again. As a result secured lending and overall the supply of
finance is expected to increase also on a cross-border level (thanks to higher level of
harmonization achieved by the directive – see also below in secured creditors section).
The last two points are especially true for SMEs rather than corporates as the latter can
also finance themselves through the capital markets (i.e. issue bonds) whereas the
former are heavily reliant on bank financing. Given the level of harmonisation
expected to be achieved by the directive the benefits are somewhat significant: a
quantification work carried out by the Commission services (see annex 4) indeed
shows that the long term annual savings for borrowers for option 2 are estimated
between EUR562M and EUR1000M. In terms of the reduction of borrowing rates, this
is estimated on average between 10 and 18 basis points.
Negative direct impacts110
:
 Companies in financial difficulties and with an unsustainable business model will see
their collateral enforced and sold/taken away quicker. The company might cease to
operate in case of enforcement of the main productive assets which will however be
recycled for a more productive use (hence resulting in a net societal/macroeconomic
gain).
Secured creditors including investors
Positive direct111
impacts:
 The formalities, time delays and costs typically associated with a court enforcement
process can be reduced for banks across the EU with the implementation of the
directive which will then to be able to enforce the collateral more quickly and cheaply
out of court across the EU in a more systematic way. This is expected to increase the
recovery rates on defaulted secured loans. Given the level of harmonisation expected
109
A positive indirect impact would be that, given that banks would be equipped with an effective and speedy
tool to enforce the collateral, this could work as default deterrent for the borrowers.
110
A negative indirect impact would be that although the mechanism is voluntary and will have to be agreed
upon by both parties in the loan contract, the negotiation power of businesses especially SME to include or not
such mechanism will be limited. This increases the need for safeguards for debtor (see social impacts).
111
A positive direct impact would be that the probability of default might decrease for secured loans given that
debtor moral hazard will be reduced: as debtors might be well aware that the collateral will be easily and quickly
enforced they will be more incentivised to pay their loans in a timely manner. However, even if the borrower is
willing to pay, its actual ability to do so depends also on external factors.
134
to be achieved by the directive, the benefits are somewhat significant: a quantification
work carried out by the Commission services (see annex 4) indeed shows that the
extra amount recovered by banks in a simulated future NPL crises is estimated at
2.3% compared to the baseline (with average recovery rate expected to increase to
78% from the current estimated level of 68%). The extra recovered amount by banks
is estimated at EUR8.1billion.
 A harmonised legal framework on out-of-court collateral enforcement should also
encourage banks to make available more credit, including possibly cross-border.
Banks will only lend cross-border if they feel comfortable to be able to recover value
in a reasonable time span from collateral taken in the other Member State. While bank
financing is hard to come by in some Member States, in others banks would be
interested in financing innovative projects. Facilitating cross-border lending could
help tackle shortage of bank financing for SMEs in some Member States. If efficient
out-of-court recovery procedures are in place in one Member State and render
domestic lending cheaper, businesses from other Member States which have the
chance will borrow from banks in that Member State by posing collateral under the
"efficient" system, e.g. a subsidiary's assets, and business will thus move towards
Member States with an efficient system whereas it would be preferable if banks in all
Member States could compete on equal footing. The harmonisation achieved by the
directive is expected to provide more transparency and certainty to secured creditors
as regards the enforcement process relating to defaulted loans across the EU. This
should contribute to reducing the build-up of NPLs and thus would encourage lending
both domestically and on a cross-border lending (as legal and research costs that
banks and secured creditors incurred when enforcing collateral cross-border would be
reduced).
 [Third party investors] The increased recovery rates will improve the conditions for
banks to tackle NPLs directly or to sell (at higher price) to third party NPL investors.
This would reduce) the bid/ask spreads explained in the problem definition from the
demand (i.e. divesting banks) side both domestically and on a cross-border basis.
Moreover, the harmonization achieved by the directive would facilitate the creation of
pan-European NPLs investors which would be able to reap the benefits of the Single
Market. The bid/ask spreads explained in the problem definition from the supply (i.e.
NPLs companies) side might be reduced.
Negative impacts112
:
 Increased reputational risk for banks which arises from the enforcement of collateral
through an out-of-court mechanism
Other commercial creditors (unsecured creditors, junior creditors, suppliers, etc.)
112
Another negative but not significant impact for secured creditors is that they will have to bear the costs
related to out-of-court collateral enforcement in a first stage. However those costs would be recouped from the
borrower once the collateral is enforced. The costs associated with out-of-court enforcement would however not
be significant for banks because they would mainly consist in costs related to the notification of the borrower in
case of default, possibly a second notification on the use of the out-of-court mechanism (if a second notification
is needed; this depends on national legislation), and the fees that need to be paid to either an authority which
would be involved in the enforcement process, such as a notary or a bailiff, or costs charged by an expert, in case
a valuation of the collateral is needed (in case of enforcement through the appropriation mechanism).
135
Positive indirect impacts:
 The underlying assumption is that collateral disposal price will be maximised through
an expedited out-of-court mechanism governed by clear rules. This should in principle
allow for a better satisfaction of secured creditors than it is the case today by enabling
those creditors to recover full value (hence the increased recovery rates as explained
above). By maximising value recovery, it is expected that this would also contribute
indirectly to increasing the estate of the borrower in cases where the borrower would
be subject to a restructuring or insolvency proceeding after the out-of-court
mechanism is used. However, this would depend on a case by case basis, on the
amount which is recovered through the use of the out-of-court mechanism and the type
of creditor concerned.
Negative impacts:
 If the out-of-court mechanism is "overused" (not only on companies with an
unsustainable business but also on companies with a sustainable business model), this
might prevent finding a deal for saving the business. Also this could be negative for
the suppliers of that corporate borrower which are likely to lose their commercial
relationship with that borrower earlier than this would have happened, should the out-
of-court enforcement mechanism not have been used. However triggering an out-of-
court procedure will be on a case by case as it could also be that the banks prefer in
certain occasions the business to be restructured rather than being put into insolvency
as a restructured business has the potential of benefiting of banks loans in the future.
Member states (competent authorities and public creditors):
Positive direct impacts:
 The positive impacts for business and secured creditors alike as described in details
above would increase the general economic sentiment in a given Member State.
 More cases will be dealt out-of-court and this would free up courts resources and
capacities to deal with other types, more complex cases (i.e. insolvency and
restructuring cases)113
. Moreover as the costs associated with the out-of-court
procedures would mainly be borne by banks and companies, and not by the taxpayers
as it is the case today for judicial enforcements of collateral, this could bring some
cost savings for the public administration.
 Equipping banks with better tools with dealing with their non-performing loans would
bring about financial stability benefits. If the build-up of future NPLs is avoided or
contained, supervisors would have more time and resources to dedicate to other
supervisory activities.
 A minimum harmonisation envisaged under this option would not change the ranking
of creditors in an insolvency proceeding and as such potential super-seniority of public
debt under national laws would be unaffected by it.
Negative impacts:
113
The possible decrease of court cases would also depend on the number of appeals against the out-of-court
enforcement procedures.
136
 Implementation costs incurred by public authorities linked to change of the law
following the directive.
Option 2 – stakeholders' views
The banking industry is supportive of the establishment of an out-of-court enforcement
procedure across the EU which would allow secured creditors (banks) to enforce collateral
without judicial court intervention in case of borrower's default. The avoidance of the court
involvement in the disposal of the collateral would help to avoid the accumulation of NPLs
through better recoveries in shorter period of time (especially in jurisdictions with suboptimal
in-court enforcement procedures). Some respondents also underlined that the threat of a
possible collateral enforcement can in itself be persuasive and reduce moral hazard of debtor.
In general banks do no automatically wish to enforce the collateral and they wish to keep the
freedom of choosing to enforce the collateral or not (which will be assured by the voluntary
nature of the mechanism). The banking industry expressed concerns as to: (i) the suspension
of the mechanism during restructurings and insolvency proceedings arguing that this
limitation would weaken the value of security and would discourage banks from supporting
restructuring efforts for a debtor's potentially viable business; and (ii) a rule which would
allow full discharge of the borrower114
. On the scope there was a general consensus for the
Commission's approach to exclude consumers and certain types of assets.
The investors and loan servicing companies expressed support. They argue that costs and time
efficiencies derived from an out-of-court process can lead to better recoveries. They also
stressed the importance of allowing for a transfer of this mechanism to investors to help the
development of secondary markets for NPLs. Echoing the banking industry, they also
expressed doubts as to the full effectiveness of this mechanism if it is switched off during
insolvency and to the full discharge of the debtor which – it is argued – might discourage
banks as the risk of a reduction in price of the collateral would be borne by the bank while an
increase would only benefit the debtor. On the scope, they also agreed with the proposed
scope given the need for special protection for the weakest party.
Government and public authorities agreed that improving the protection of secured creditors
is instrumental in resolving and reducing NPLs. A greater convergence of secured loan
enforcement (both judicial and extrajudicial) in the EU could benefit enterprises by
facilitating credit. Fragmented legal frameworks and the inefficiencies in the national judicial
systems represents vulnerability for bank stability (through the possibility of systemic crisis)
having a negative impact on the capacity of financial institutions to provide lending. Some
Member States expressed doubts that such an instrument can significantly accelerate the
enforcement process in those Member States where procedures carried out by courts are
already handled in a short period of time. One Member State argued that while out-of-court
procedures can be beneficial, the solution to the NPL problem lies mainly on strengthening
the judicial procedure across the EU.
114
Banks argued that this could encourage borrowers to act irresponsibly and increase speculative behaviours
especially when the recovered value from the sale of assets is lower than the value of the outstanding amount.
137
Two out of the four Member States which currently do not have out-of-court enforcement
procedures for collateral (DK and MT) support the objectives of the Commission to introduce
such mechanisms for loans granted to companies and entrepreneurs (with the exclusion of
consumers and the primary residence of a corporate owner), but insist that out-of-court
enforcement procedures should not interfere with the Commission's proposal on preventive
restructuring and second chance, and with Member States' insolvency laws. They consider
that an EU framework on an out-of-court instrument would provide further optionality to
banks that wish to enforce loans to avoid accumulation of NPLs and may improve capital
flows to the country as lenders would have pre-determined exit routes.
Government and public authorities also agree on the scope exclusions based on social equity
grounds. Finally while recognizing the need of appropriate balance between legitimate
interests of secured creditors in having their rights enforced without delay and the protection
of the rights of debtors, they expressed doubts about the full discharge for the debtor as this
could call into question the strengthening of the position of secured creditors as any
subsequent (to the loan disbursement) decrease in value of the assets results in a unilateral
burden for the creditor. One safeguard for debtors suggested by one Member States is to
involve a third party responsible to oversight the process and assuring that the interests of
both creditors and debtors are met.
Law firms also highlighted that an efficient, out-of-court enforcement process is essential for
all security rights to ensure that there are effective and facilitate resolution of debts. The
overall flexibility afforded by the provisions is then likely to lead to better recoveries. The
formalities, time delays and costs typically associated with a court enforcement process are
also not present, which enables the security to be enforced more quickly and cheaply. Further,
any moral hazard on the part of the debtor caused by lengthy court enforcement processes is
also avoided. They also mentioned that third-party loan servicers may be more willing to use
an out-of-court option as they have less fear of reputational damage especially in jurisdictions
where lenders view court enforcement as providing a layer of protection from liability vis-à-
vis those borrowers who claim the proceeds should have been higher. Law firms see merit in
EU action to establish a common enforcement procedure because this would provide banks
with certainty in respect of process and timing to enforce security.
Consumer associations, NGOs and private individuals also agreed with limiting the scope of
application on social equity ground.
Business associations did not respond to the public consultation but their views were heard in
an ad-hoc meeting organised by the Commission services. Although there was not a formal
official position since a consensus inside the members of their associations had not been
reached at the time of the meeting, the representatives agreed in their personal capacity about
the usefulness of the system arguing however that this is higher in those Member States
without such a system or with an inefficient system (the Spanish mechanism was mentioned)
especially in those Member States with current high level of non-performing loans. The main
benefit mentioned was a reduction in risks and hence a decrease in lending rates especially for
SMEs arguing that the interest rate differential for SME borrowing costs in the EU (and
especially the Eurozone) is partially explained by the differences in the level of
138
(in)efficiencies in recovery value / enforcement procedures among Member States. The need
for safeguards for debtors would inevitably be priced in by the lenders.
The expert group called on the Commission to avoid creating a new security right
accompanied by an out-of-court enforcement mechanism. According to the experts, doing so
would interfere too much with national legal systems and would be extremely complex
insofar as very technical provisions are closely linked to national rules on security law,
transfer of ownership, publicity requirements, and ranking of creditors in insolvency. The
expert group sees merit and is supportive of an EU measure which would establish a common
framework for out-of-court enforcement of collateral. A common framework on out-of-court
collateral enforcement would increase legal certainty and predictability for banks as regards
their ability to enforce collateral swiftly. This would allow banks to recover more value in
case of borrower's default and would therefore put assets to a better use and create incentives
for banks to give more loans to companies. The expert group insisted on the need for a swift
and transparent procedure, given that existing mechanisms are often not used in practice
because they do not ensure an expedited process to allow for value recovery (i.e. process
leading to selling assets much below market value, which is neither satisfactory for banks, nor
for the borrowers).
Option 3 – pros and cons
Pros:
 This option would make available a new security right which could be used by banks
to secure loans, upon voluntary agreement with companies and entrepreneurs, together
with a fully harmonised extrajudicial enforcement mechanism. Because the new
security right would be regulated at EU level and the enforcement procedure fully
harmonised, banks in all Member States would benefit in a uniform way from the
possibility to recover value from secured loans, should they choose the ALS. This
would increase legal certainty and predictability. From a single market perspective,
banks would no longer have to invest time and bear costs related to assessing the way
in which they can recover value on a cross-border basis. Option 3 would lead to a
decrease in the cost of cross-border transactions and would facilitate cross-border
lending to companies and entrepreneurs to the greatest extent.
 The full harmonisation of the extrajudicial enforcement mechanisms for secured loans
in the Member States would ensure that the same expedited and effective procedure is
available across the EU, it is hence expected there would be somewhat significant
benefits both for banks (in terms of reduction in recovery rates) and business
borrowers (in terms of reduction in interest rates).
 The out-of-court enforcement is easier in case ALS given the legal certainty it offers
as regards the ownership of the collateral at the moment of borrowers' default. As
matter of fact because the creditor is the owner from the signing of the loan
agreement, the creditor can take actions to take swiflty the possession of the collateral.
Cons:
139
 While Option 3 would bring the most in terms of harmonisation and a true uniform out-of-
court enforcement procedure, it would have a major impact on Member States' legal
frameworks. The creation of new independent EU collateral in addition to the ones existing
at national level would require the integration of such a new security right into Member
States' legal systems. That is because it would require Member States to adjust and align
numerus areas of their national legal systems (e.g. property law, private and public law,
registration rules, insolvency laws etc.), which are largely different across EU, reflecting
their respective legal traditions, political choices and economic structures.
 The establishment of a new security right would raise the politically sensitive issue of
hierarchy of creditors in pre-insolvency and insolvency procedures. It might be difficult to
accept by Member States, because of numerous changes which they would have to make to
adapt their legal frameworks to a new type of security. Member States would also need to
ensure that current formalities and publicity requirements for existing security rights are
modified to take into account the establishment of an EU register for the publication of
ALS.
 The establishment of a new security right might create complexity and legal
uncertainty in the Member States which already have a security right with similar
features. For example, where a similar right exists in a Member State, it might become
difficult for banks and corporates to decide which security to choose between the one
which currently exist and the one which might be established through EU legislation.
 The establishment of a new security right would lead to significant compliance costs,
especially as regards the implementation of a new security right, the relevant
formalities/publicity requirements, training of the legal professions in relation to the
application of a new security right, and for the implementation of a fully harmonised
extrajudicial enforcement procedure. Important compliance cost would be expected by
the industry to adapt contracts and practice to the use of a new security right.
Option 3 – stakeholders' impact
Corporate (including entrepreneurs and SME) as borrowers
Positive direct115
impact:
 Borrowing costs for business borrowers are expected to decrease as banks with ALS
(i.e. an EU security right with an effective, expedite way to enforce out of court) can
expect both a lower probability of default (since debtor's moral hazard is reduced) and
a lower loss given default (as the collateral value will not diminish due to lengthy
court procedures). With reduced risks, banks will adjust their pricing accordingly (i.e.
downwards). Moreover thanks to the reduction of risks explained above (especially
the lower loss given default) more projects which were not able to get financing
previously would now become financeable again. As a result secured lending and
overall the supply of finance is expected to increase also on a cross-border level
(thanks to highest level of harmonization achieved by the regulation – see also
115
A positive indirect impact would be that, given that banks would be equipped with an effective and speedy
tool to enforce the collateral, this could work as default deterrent for the borrowers.
140
explanations below in secured creditors section). The last two points are especially
true for SMEs rather than corporates as the latter can also finance themselves through
the capital markets (i.e. issue bonds) whereas the former are heavily reliant on bank
financing. Given the level of harmonisation expected to be achieved by the regulation
the benefits are somewhat significant: a quantification work carried out by the
Commission services (see annex 4) indeed shows that the long term annual savings for
borrowers for option 3 are estimated between EUR634M and EUR1129M. In terms of
reduction of borrowing costs this is estimated between 11 and 19 basis points116
.
Negative direct impacts117
:
 Companies in financial difficulties and with an unsustainable business model will see
their collateral enforced and sold/taken away quicker. The company might cease to
operate in case of enforcement of the main productive assets which will however be
recycled for a more productive use (hence resulting in a net societal/macroeconomic
gain).
Secured creditors including investors
Positive direct118
impacts:
 A fully harmonised legal framework around a new security right and an out-of-court
collateral enforcement would provide the highest transparency and certainty to
secured creditors as regards the enforcement process relating to defaulted loans across
the EU. The formalities, time delays and costs typically associated with a court
enforcement process can be reduced for banks across the EU hence being able to
enforce the collateral more quickly and cheaply out of court. This is expected to
increase the recovery rates on defaulted secured loans. Given the high level of
harmonisation expected to be achieved by the regulation, the benefits are somewhat
significant: a quantification work carried out by the Commission services (see annex
4) indeed shows that the extra amount recovered by banks in a simulated future NPL
crises is estimated at 2.6% compared to the baseline (with average recovery rate
expected to increase to 80% from the current estimated level of 68%). The extra
recovered amount by banks is estimated at up to EUR 9 billion.
 From the perspective of the single market, this option should create the highest
incentives for cross-border enforcement, cross-border lending and the development of
secondary markets for NPLs because it would eliminate the most the uncertainty and
costs related to assessing the business environment and to enforcing security rights
cross-border. While being very "intrusive", a harmonised approach to this ALS-type,
adopted under the form of an EU Regulation could increase the willingness of banks
116
This is net of a possible increase in basis points that reflect the increased costs of the implementation of a new
security right
117
A negative indirect impact would be that although the mechanism is voluntary and will have to be agreed
upon by both parties in the loan contract, the negotiation power of businesses especially SME to accept the ALS
as security right (and hence to include or not out-of-court mechanism) will be limited. This increases the need for
safeguards for debtor (see social impacts).
118
A positive direct impact would be that the probability of default might decrease for secured loans given that
debtor moral hazard will be reduced: as debtors might be well aware that the collateral will be easily and quickly
enforced they will be more incentivised to pay their loans in a timely manner. However, even if the borrower is
willing to pay, its actual ability to do so depends also on external factors.
141
to lend to businesses on a cross-border basis. In situations the ALS proceedings need
to be instigated, the bank could trigger the loan security in contracts written under the
law of its country to take possession of collateral located in another Member State.
The possibility to enforce these rights cross-border would be therefore relatively clear
and certain.
 [Third party investors] The increased recovery rates will improve the conditions for
banks to tackle NPLs directly or to sell (at higher price) to third party NPL investors.
This would reduce the bid/ask spreads explained in the problem definition from the
demand (i.e. divesting banks) side both domestically and on a cross-border basis.
Moreover, the highest harmonization achieved by the regulation would facilitate the
creation of pan-European NPLs investors which would be able to reap the benefits of
the Single Market. The bid/ask spreads explained in the problem definition from the
supply (i.e. NPLs companies) side might be reduced.
Negative impacts119
:
 Increased reputational risk for banks which arises from the enforcement of collateral
through an out-of-court mechanism
 In case of appropriation, the banks will have to internalise other risks (environmental
and other liabilities) and also consolidate the assets on their balance which will eat
away somewhat their capital and lending capacity
Other commercial creditors (unsecured creditors, junior creditors, suppliers, etc..)
Positive indirect impacts:
 The underlying assumption is that collateral disposal price will be maximised through
the ALS. This should in principle allow for a better satisfaction of secured creditors
than it is the case today by enabling those creditors to recover full value (hence the
increased recovery rates as explained above). By maximising value recovery, it is
expected that this would also contribute indirectly increasing the estate of the
borrower in cases where the borrower would be subject to a restructuring or
insolvency proceeding after the out-of-court mechanism is used. However, this would
depend on a case by case basis, on the amount which is recovered through the use of
the out-of-court mechanism.
Negative impacts:
 If the ALS is "overused" (not only on companies with an unsustainable business but
also on companies with a sustainable business model), this might prevent finding a
deal for saving the business. Also this could be negative for the suppliers of that
corporate borrower which are likely to lose their commercial relationship with that
119
Another negative but not significant impact for secured creditors is that they will have to bear the costs
related to out-of-court collateral enforcement in a first stage. However those costs would be recouped from the
borrower once the collateral is enforced. The costs associated with out-of-court enforcement would however not
be significant for banks because they would mainly consist in costs related to the notification of the borrower in
case of default, possibly a second notification on the use of the out-of-court mechanism (if a second notification
is needed; this depends on national legislation), and the fees that need to be paid to either an authority which
would be involved in the enforcement process, such as a notary or a bailiff, or costs charged by an expert, in case
a valuation of the collateral is needed (in case of enforcement through the appropriation mechanism).
142
borrower earlier than this would have happened, should the out-of-court enforcement
mechanism not have been used. However triggering an out-of-court procedure will be
on a case by case as it could also be that the banks prefer in certain occasions the
business to be restructured rather than being put into insolvency as a restructured
business has the potential of benefiting of banks loans in the future.
Member states (competent authorities and public creditors):
Positive direct impacts:
 The positive impacts for business and secured creditors alike as described in details
above would increase the general economic sentiment in a given Member State.
 More cases will be dealt out-of-court and this would free up courts resources and
capacities to deal with other types, more complex cases (i.e. insolvency and
restructuring cases)120
. Moreover as the costs associated with the out-of-court
procedures would mainly be borne by banks and companies, and not by the taxpayers
as it is the case today for judicial enforcements of collateral, this could bring some
cost savings for the public administration.
 Equipping banks with better tools with dealing with their non-performing loans would
bring about financial stability benefits. If the build-up of future NPLs is avoided or
contained, supervisors would have more time and resources to dedicate to other
supervisory activities.
Negative impacts:
 Implementation costs incurred by public authorities linked to change of the law
following the recommendation are significant.
 Potential significant compliance costs, especially as regards the implementation of a
new security right, the relevant formalities/publicity requirements, training of the legal
professions in relation to the application of a new security right, and for the
implementation of a fully harmonised extrajudicial enforcement procedure. The
establishment of an EU register for the publication of the secured loans which could
be enforced out-of-court would also imply costs related to the necessary infrastructure
and transmission of information to that register.
 The creation of a new security right will entail extra costs. These will depend on the
levels set by MS and is difficult to foreseen at EU level. However the best
approximation is given by the costs for existing security rights.
Box on cost of carrying out publicity formalities
As documented in a recent report121
, countries have substantially different approaches when it
comes to registration of security rights or filling in with a public authority both of which are
referred to as "publicity formalities". For instance, in Finland or in the Netherlands publicity
formalities are free of charge or the applicable costs are immaterial. In the majority of cases,
however, taking security triggers significant costs, often related to the value of the secured
120
The possible decrease of court cases would also depend on the number of appeals against the out-of-court
enforcement procedures.
121
Guide to Cross-Border Secured Transactions – Deloitte – December 2013
143
liabilities or of the asset subject to security. Such costs generally differ based on the object of
the security (see Table 18 below):
 Mortgages over real estate assets usually trigger notary fees, mortgage fees or taxes
and registration fees with the land registries;
 Security over non-real estate assets usually triggers costs related to registration which
generally is significantly lower than the cost for taking security over real estate
The duration of carrying out public formalities also differs among jurisdictions with e.g. one
day needed in Bulgaria for real estate assets and between three and four months for Poland.
Also publicity formalities can have different enforceability effects: for example in the case of
Romania and Belgium even though the validity of the security is not affected by the lack
of/delay in performing the publicity formalities until such formalities are carried out the
security is not enforceable towards third party.
Table 18 – Cost of carrying out publicity formalities
Source: Guide to Cross-Border Secured Transactions – Deloitte – December 2013
Option 3 – stakeholders' views
The banking industry sees the potential benefits of an ALS such as increase in access to
capital, increased stability of the financial sector and more cross-border lending. The benefits
would be especially visible if the instrument remains enforceable in insolvency/pre-
Publicity Costs Real Estate Assets Non Real estate assets
Belgium
• registration fee 1% inscription fee of the amount of the mortgage
• inscription fee 0.30% of the amount of the mortgage
Pledge over business/floating charge: 0.5%
on the amount of the floating charge
Bulgaria
• notary fee: maximum EUR 3,000
• land registry fee: 0.01% of the value of the secured amount
Up to EUR 100
Croatia
notary fee: from 0.5% to 1% of the value of the asset or of the value of the
secured claim
(whichever is lower)
Up to EUR 100
Czech Republic varies from 1% to 0.05% depending on the value of the mortgage Up to EUR 100
England and Wales between GBP 0 and EUR 300 Up to EUR 100
Finland not material, not related to value of the transaction or of the secured amount n.a.
France
• real estate security tax: 0.05% of the secured amount
• land registration tax: 0.715% of the registered amount
Up to EUR 150
Hungary
• notary fees: depend on the value of the secured claim and capped at EUR
660,000; for mortgages set up by credit institutions the applicable fees are 25%
of the regular fees
• land registry fee: EUR 40 per real estate
Up to EUR 150
Italy
notary fee: approx. 2% of the value of the secured amount, but the notary may
reduce at its
discretion
n.a.
Latvia
• land book fee: 0.1% of the value of the obligation but capped at EUR 1425
• notary fee: 71 EUR
Less than EUR 50
Lithuania • less than EUR 200 n.a.
Luxembourg
• registration fee 0.24% of the value of the secured debt
• mortgage tax of 0.05% for the first registration and every renewal
• notary fee also applies and depends on the value of the secured amount
Registration fee 0.24% of the value of the
secured debt and mortgage tax of 0.05% for
the first registration and every renewal
Poland
• notary fee: up to approx. EUR 1200 and civil law transaction tax of 0.1% of the
amount secured
Less than EUR 50
Romania
• notary fee: 0.07% of the value of the secured amount
• land registry fee: 0.1% of the value of the secured amount
Up to EUR 100
Slovenia • less than EUR 150 Up to EUR 100
Spain
• notary fee: percentage of the secured amount; fee agreed between the
parties and the notary for secured amounts higher than EUR 6 million
• registry fee: 0.02% of the secured liability
• stamp duty: 0.5% to 1.5% of the secured liability
n.a.
The Netherlands
• less than EUR 150
• notary fee: 0.01% of the value of the mortgage
Free of charge
144
insolvency procedures although it is recognised that such an advantage for secured creditors
cannot be integrated into national insolvency regimes without significant disruptions.
However because of inherent risks associated especially mortgaged real estate, all respondents
from the banking industry (barring one) said that it would be preferable that banks be granted
authority to sell instead of becoming owner of the assets in the case of an out-of-court
enforcement procedure under the form of appropriation. In the case of appropriation, if a bank
would repossess the asset granted as collateral by the borrower, the bank would have to
consolidate the repossessed assets on its balance sheets. Banks consider that such a process
takes away some of the lending firepower. Therefore, banks call for being allowed to sell the
assets which they would repossess through the appropriation procedure. Private sales or
auctions (public sales) were mentioned as alternative methods to satisfy the lenders while
keeping the assets off the balance sheet. Moreover the banking industry recognizes that the
ALS as a contractual right would have to be implemented through a tailored approach in each
Member State in order to accommodate the existing legal framework of private laws which
are highly divergent within the EU. As for option 2, there is no support for debtor's full
discharge. Banks call for efficient judicial systems which would exercise judicial control and
protect the rights of borrowers.
For investors and loan servicing companies it is important that the ALS be transferrable to the
investors. Otherwise this would create an obstacle for the development of secondary markets
for NPLs. In general the views of investors and loan servicing companies are aligned with
those of banks on i) scope; ii) the need to provide the banks the power of attorney for the sale
of asset instead of transferring the property and iii) on the discharge (instead of which it was
suggested that a way to invective the use of ALS would be to make it cheaper compared to
other security rights in terms of tax and registration requirements).
Government and public authorities also underlined the uncertainties associated with the
acquisition and realisation of the collateral as foreseen in the ALS especially in the case of
real estate where a large number of burdens are associated with ownership entailing expenses,
costs and risks. Moreover transferring the main assets to the bank would result in severe
disruption of the normal business operations and deteriorates the ability of the firm to repay
the remaining part of the loan (if the outstanding amount was higher than the value of the
assets) as well as the ability to service other debts. Government and public authorities also
stated that the creation of an independent European security instrument in addition to the
existing security interests under national law could be seen as a sensible approach only if it
could be integrated into the national legal orders (in particular property law and enforcement
law) which differ substantially in MS according to their respective legal traditions and
economic structures.
Law firms see the potential positive effects of ALS in avoiding accumulation of NPLs and
improving lending as lenders will be equipped with pre-determined exit routes; however they
caution that the appetite to enforce through an ALS would be lender-specific and voluntary
hence limiting somewhat the potential effects. Moreover it is argued that the best value is
rarely attained by forcing the repossession of asset as this leaves the bank with an asset which
does not provide any productivity between repossession and sale. It is suggested by one
respondent that repossession should not be the preferred route in the following cases: i) when
145
mediation is possible; ii) the asset is in use, resale is not immediately available, the absence of
the asset would worsen the situation of the borrower with no advantage for the lender; iii) the
market for resale is insufficient to ensure that the repossession will be more profitable that a
more operational solution.
Consumer associations, NGOs and private individuals provided comments on the features of
the ALS: i) compulsory setting of a (minimum) value of the assets in advance by an
independent expert, following the criteria that could be set out in the security right or in the
loan contract; ii) there should be a mandatory duty to pay back the difference to the borrower
once the asset is sold whenever the valuation of the asset leads to a value higher than the debt
amount and iii) the mechanism trigger should be subordinated to a request by the bank to the
borrowers for a revised business plan and possible restructuring – only in case of a failure to
comply with this request the bank should be able to trigger the mechanism.
Business associations did not respond to the public consultation on ALS and did not express
any views on this during the ad-hoc meeting but mainly on the less intrusive policy options
(i.e. policy option 1 and 2).
The expert group was against creating a new security right (ALS) accompanied by an out-of-
court enforcement mechanism. According to the experts, establishing a new security right
would interfere too much with national legal systems and would be extremely complex
insofar as very technical provisions are closely linked to national rules on security law,
transfer of ownership, publicity requirements, and ranking of creditors in insolvency. Experts
also pointed to the little value-added of establishing a new security right because the real
problem does not rely in the absence of security rights in the Member States, but in the lack of
efficient out-of-court mechanisms for enforcing existing security rights.
146
Annex 7 – Background information
I. Role of security interests and secured lending
Security interest is a legal instrument used by borrowers and lenders to secure the
performance of a principal obligation. The security interest relies on so-called 'collateral' –
e.g. assets (tangible or intangible, movable or immovable) granted by a borrower to secure a
loan. A security interest right stands thus alongside the principal obligation, which is the loan
agreed by the lender and the borrower. The lender can seize the collateral if the borrower fails
to make the agreed-upon payments on the loan. The enforcement of the collateral therefore
protects the lender from the borrower's default by allowing the creditor to recover value from
the asset granted as collateral to compensate for the loss incurred with the failure of the
borrower to pay back the loan. Collateral therefore contributes to reducing banks' risk
exposure and loan loss122
. Ideally, following the enforcement of the collateral the creditor
should not incur any loss as a result of having granted a loan which has not been paid back by
the borrower.
Enforcement refers to the ability of the creditor (collateral taker) to realise123
the assets which
have been granted as collateral by borrowers. A creditor acquires such a right to enforce
collateral when the borrower is in default, meaning that the borrower does not fulfil the
contractual terms of paying the loans under the terms and conditions agreed upon the
signature of the loan agreement. Loan agreements specify what constitutes a default of the
borrower for the purpose of allowing the creditor to enforce collateral. Enforcement can be
done either in court, (judicial enforcement), or without the intervention of the judicial court.
The latter is referred to as out-of-court or extrajudicial enforcement.
In loan agreements, the use of collateral strengthens (i.e. "secures") the right of the lender to
obtain the performance of the loan obligations. In doing so collateral reduces perceived risk
from a lender's perspective and thereby allows firms to more easily obtain the financing
needed for their investment projects. Economic literature identifies several possible
motivations for the use of collateral124
: ex ante information asymmetries about the project
quality (see Stiglitz and Weiss, 1981), ex post moral hazard issues with respect to the
entrepreneur's effort and risk choices (for example Holmstrom and Tirole, 1997), limited
contract enforceability (e.g. Cooley et al., 2004), and costly project monitoring (see
Townsend, 1979, or Williamson, 1986). In essence, the foreclosure of collateral affects a
borrower’s incentives to repay the loan because in case of failure to do so, assets given as
collateral will be lost. This incentive effect may be further reinforced by the market practice
of over-collateralisation, whereby lenders require collateral that covers more than the amount
of the loan. Generally the extra amount of collateral is intended to cover possible loss should
the asset be sold in a context of falling asset prices (so-called fire-sale). From a creditor's
perspective, it is important not only to have the ability to enforce the collateral should the
borrower fail to pay the loan, but also to be able to recover enough value to avoid a loss. For a
123
Or appropriate the asset, depending on the type of the security right.
124
Based on the review of this literature in Berger et al. (2011).
147
creditor to enforce collateral at a price which avoids incurring a loss, the enforcement
procedure should be clear, swift and effective.
With a relatively lower probability of default and protection from the collateral, lenders
may be more willing to lend their money to a risky but viable project, which otherwise
would have not received financing and/or would be offered a very high interest rate.
Economic research shows that collateralised lending is more commonly associated with
riskier borrowers, but for a given borrower the fact to use collateral reduces the lending
interest rates (Booth and Booth, 2006).
In the EU125
as of December 2016 the stock of secured loans granted to non-financial
corporations amounted to more than EUR2.5 trillion and represented around 50% of the total
loans and advances to non-financial corporations. In the majority of the countries in the
sample (18 out of 23) secured lending is predominant (more than 50% of total lending) with 8
countries showing level of share of secured lending higher than 70% of the total (see Figure 1
below).
Figure 15 – Share of secured loans in total loans and advances to non-financial corporations,
2016
Source: ECB Consolidated Banking Data; Note: data not available from Spain, UK, Bulgaria, Hungary, Ireland
II. Recovery procedures (judicial and non-judicial) in case of debtor's default
Insolvency is a financial state in which a natural or a legal person (a company) is unable to
meet its financial obligations. Formal insolvency proceedings entail a judicial process, in
which a judge assesses whether the company/individual entrepreneur is insolvent and
considers what legal proceedings best fit the situation. Moreover, in order to avoid a
disorderly run of creditors on the company, a set of rules and principles ensure trust and
predictability of the procedures via setting up a certain order of repayment of creditors (i.e.
ranking of creditors) and the equal and fair treatment for same (categories of) creditors (i.e.
pari-passu and/or the par condicio creditorum). Before starting any formal procedure, the
court has to declare the debtor as ‘insolvent’.
Growing recognition of the burden involved with the official insolvency proceedings, in terms
of time and cost for recovering value, has led to much more focus on improving tools
available before the company becomes insolvent. Preventive restructuring (also known as pre-
125
Based on ECB consolidated data as of December 2016 (data not available for ES, UK, BG, HU and IE)
148
insolvency) proceedings are those actions that anticipate insolvency and overcome debtor’s
financial difficulties. Restructuring proceedings typically require a limited involvement of
judicial court (e.g. creditors have to agree upon a "restructuring plan" to reorganise financial
claims, which courts only evaluate and approve at the end of the process). In this way, the
company, which has been considered as potentially viable, has the possibility to overcome its
temporary financial difficulties and prevent the trigger of the insolvency proceeding.
In case of debtor's default in repaying back its loans, and before or regardless
insolvency proceeding, other targeted out-of-court credit recovery procedures are
usually possible. Such extra judicial enforcement mechanisms are not present in some
Member States and when existing are not always efficient The focus of this impact
assessment is on these extra judicial enforcement mechanisms.
Figure 16 – Timeline from default to insolvency proceedings
III. Related EU actions
This initiative fits within a wider range of actions already undertaken at European level.
Section 2.3.1 presents the EU legislation adopted in the area of out-of-court enforcement of
collateral but outside the scope of this initiative as it regulates the specific area of financial
collateral. Section 2.3.2. summarises a recent Commission proposal on preventive
restructuring and second chance proceedings which is currently discussed by the co-
legislators. The document in the relevant sections also explains how the consistency between
the latter and the initiative subject to this impact assessment will be assured.
III.A Financial Collateral Directive
With the Financial Collateral Directive (FCD)126
, a European regime was introduced for the
provision and enforcement of collateral under the form of securities, cash and credit claims.
The types of arrangements covered by the FCD are title transfer financial collateral
arrangement and security financial collateral arrangement. The latter encompasses mortgages,
pledges, fixed charges, floating charges and liens.
126
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32002L0047
149
The only harmonised rules on extrajudicial enforcement refer to specific category of financial
collateral where the collateral taker and the collateral provider belong to one of the following
categories: a) a public authority, b) a central bank, c) a financial institution subject to
prudential supervision, d) a CCP, e) a person other than a natural person, including
unincorporated firms and partnerships, provided that the other party is an institution as
provided in points a) to d).
The objective of the FCD was to harmonise the process for creating and enforcing financial
collateral. In cases where parties agree to this in writing, the collateral taker can "appropriate"
the collateral without a court order for disclosure.
The initiative on out-of-court enforcement of collateral under the form of movable and
immovable assets would not interfere with the collateral governed by the FCD, but aims
at making available such out-of-court enforcement to secured creditors in the case of
loans granted to companies and entrepreneurs. The scope of this initiative would be
different than the scope of the FCD.
III.B Commission proposal on preventive restructuring and second chance
In November 2016, as had been announced in the 2015 CMU Action Plan, the Commission
tabled a legislative proposal on "preventive restructuring frameworks, second chance and
measures to increase the efficiency of restructuring, insolvency and discharge procedures"127
.
That proposal sets common principles on the use of early restructuring frameworks to help
viable companies continue their activity and rules to allow entrepreneurs to benefit from a
second chance and a full discharge of debts. It will also provide prescriptions that help to
make the insolvency proceedings more effective within the EU. One of the main
achievements of the proposal will be to improve the efficiency of the use of Member
States' judicial systems in the context of insolvency and restructuring:
 Flexible preventive restructuring frameworks will reduce the formal recourse to
courts. However, where necessary or deemed useful, the courts will be involved in
restructuring proceedings to safeguard the interests of all the relevant parties.
 Specialised judges and practitioners as well as purpose-built technology in the data
collection will improve the efficiency of insolvency procedures and reduce their cost
and length.
The proposed Directive focuses on three key elements:
 Common principles on the use of early restructuring frameworks, which will help
companies continue their activity and preserve jobs.
 Rules to allow entrepreneurs to benefit from a second chance, as they will be fully
discharged of their debt after a maximum period of 3 years.
 Targeted measures for Member States to increase the efficiency of insolvency,
restructuring and discharge procedures. This will reduce the excessive length and costs
127
Proposal on "preventive restructuring frameworks, second chance and measures to increase the efficiency of
restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU" -see
http://ec.europa.eu/information_society/newsroom/image/document/2016-48/proposal_40046.pdf.
150
of procedures in many Member States, which results in legal uncertainty for creditors
and investors and low recovery rates of unpaid debts.
The new rules will observe the following key principles to ensure insolvency and
restructuring frameworks are consistent and efficient throughout the EU:
 Companies in financial difficulties, especially SMEs, will have access to early
warning tools to detect a deteriorating business situation and ensure restructuring at an
early stage.
 Flexible preventive restructuring frameworks will simplify lengthy, complex and
costly court proceedings. Where necessary, national courts must be involved to
safeguard the interests of stakeholders.
 The debtor will benefit from a time-limited ''breathing space'' of a maximum of four
months from enforcement action in order to facilitate negotiations and successful
restructuring.
 Dissenting minority creditors and shareholders will not be able to block restructuring
plans but their legitimate interests will be safeguarded.
 New financing will be specifically protected increasing the chances of a successful
restructuring.
 Throughout the preventive restructuring procedures, workers will enjoy full labour law
protection in accordance with the existing EU legislation.
Training, specialisation of practitioners and judges and the use of technology (e.g. online
filing of claims, notifications to creditors) will improve the efficiency and length of
insolvency, restructuring and second chance procedures.
This initiative on out-of-court enforcement of collateral is shaped in a way to ensure full
consistency and complementarity with the Commission proposal on preventive
restructuring frameworks. While the former refers to extra-judicial enforcement of
collateral, the latter aims at providing for a harmonised judicial framework on
preventive restructuring and second chance for companies and entrepreneurs. The
extra-judicial enforcement of collateral would be possible as long as a preventive
restructuring is not commenced. The commencement of a preventive restructuring
procedure, i.e. a collective or semi-collective procedure involving all or a significant part of
the debtor's creditors, shall suspend any individual enforcement actions on the part of
creditors, be they judicial or extra-judicial actions.
IV. The size of the NPL problem in the EU
The gross carrying amount of NPLs in the banking system in the EU at the end of 2016
amounted to around EUR 1 trillion representing almost 7% of EU GDP while the net amount,
taking into account loan loss provisions, stood at almost EUR 0.55 trillion a figure which is
close to more than all the capital banks raised since 2011, more than six times the annual
profits of the EU banking sector, or more than twice the flow of new loans128
.
128
http://voxeu.org/article/search-european-solution-non-performing-loans
151
The NPL ratio129
for the EU banking system is slowly decreasing, and amounts to 5.1% in
December 2016 (from 6.5% in December 2014 and 5.7% in December 2015). The decrease in
the ratio has been driven mainly by an actual decrease in NPLs, but also by an increase in
total loans. The EU level remains higher than in other major developed countries: in
comparison, the World Bank reported NPL ratios of about 1.5% for the United States and
Japan at the end of 2016. In particular, compared to the financial crisis in the US, the
recognition of losses has been slower in Europe than in the US (NPLs ratios peaked in
2012 in the EU vs 2009 in the US), and the subsequent reduction in NPLs is also more
gradual.
The reduction in NPLs observed over the past years however has been uneven across Europe
and the NPL ratio is highly dispersed across EU countries ranging from 1 % to 46%. As such
Member States can be classified in the three categories (see Table 19):
 9 Member States with low levels of NPLs, and with no significant rise in NPLs during
the crisis (group/category 1: Belgium, Germany, Denmark, Finland, France,
Luxembourg, the Netherlands, Sweden, UK);
 9 Member States with low levels of NPLs but which have reported a high level or a
high increase of NPLs during the crisis (group/category 2: Austria, Czech Republic,
Estonia, Spain, Hungary, Lithuania, Latvia, Poland, Slovak Republic);
 10 Member States with currently high level of NPLs (group/category 3: Bulgaria,
Cyprus, Greece, Croatia, Ireland, Italy, Malta, Portugal, Romania, Slovenia)
129
Average of NPLs/ total loans weighted by total loans
152
Table 19 – NPL ratios in Member States as of December 2016
Source: EBA, ECB (* refers to data available as of June 2016)
More than half of currently impaired loans were extended to non-financial companies130
.
The NPL problem is particularly acute for SMEs as the ratio of exposures towards small
and medium-sized enterprises (SMEs) is higher (16.7%) than for exposures towards
large corporates (7.5%) and households (4.7%) (see Figure 17 below). Higher NPL levels
in SME lending may be related e.g. to their greater reliance on bank financing, lower
diversification, and more difficult financial situation. Additionally, recoveries on SME
lending may be lower due to, among other factors, for instance the fact that enforcing
collateral on SMEs can be much more complex than on households (as a large part of
household debt is secured by mortgages) when enforcement is the adopted strategy131
.
Probability of default rate is also higher for SMEs than for larger companies.
130
61% as of Dec 2015 – ESRB Secretariat Based on Consolidate banking data - ECB
131
FSC Report
153
Figure 17 – Non-performing loan ratios by borrower category
Source EBA; Note: Data refer to end-2016
Finally focussing on NPLs to non-financial corporations and in particular on the relationship
between the collateral and loan loss provisions (i.e. accumulated impairment), figure 6 below
shows that valuation of collateral in the books of the banks is an important source of
theoretical coverage of non-performing loans.
Figure 18 – Non-performing loans to non-financial corporations and coverage (% of total
gross loans to non-financial corporations)
Source FSC report - Data refers to Q3-2015 - Consolidated Banking Data (ECB). No data for Czech Republic,
Slovakia and the United Kingdom. Member States are ordered according to the ratio of non-performing loans to
non-financial corporations to total loans to non-financial corporations
Box on cross-border lending132
Cross-border banking brings important stability and risk-sharing benefits, through its effects
132
Box based on ECB (2017): "Cross-border banking in the euro area since the crisis: what is driving the great
retrenchment?", Financial Stability Review, November 2017.
154
on risk diversification. Financial integration in banking markets not only has aspects related to
the pricing of loans, but also has aspects related to the quantity of loans provided. Banks can
provide cross-border credit either locally, through their affiliates, or via direct cross-border
loans. Growing EU (and especially euro area through the banking union) business activity
through one of these channels would signal that banking markets are well integrated and that
benefits from efficient allocation of savings to the best investment opportunities are being
fully exploited. Contraction of cross border lending can either signal frictions in the
integration of financial markets or differential developments of profitable investment
opportunities across countries.
Cross-border credit provided by local affiliates of foreign banks seems to be stable at low
levels. Cross-border lending to NFCs via direct cross-border loans in the euro area has been
showing an upward trend, but at low levels:
i) Cross-border credit provided by local affiliates of foreign banks stagnated in total.
The share of both total assets and total loans of non-domestic affiliates remained at
low levels of around 14% (Figure 19). This number masked high cross-country
heterogeneity: whereas in large countries the shares were below 10%, most of the
small countries had shares of more than 80%. Non-domestic affiliates had on
average much lower total assets and total loans than domestic affiliates. Overall,
the total number of non-domestic affiliates in euro area countries steadily declined
as from 2011, which is line with the general trend of reducing bank affiliates in the
euro area
Figure 19 – Non-domestic affiliates in euro area countries
Source: ECB (consolidated banking data); Notes: Total number (left-hand scale), percentages (right-hand scale).
Foreign-controlled affiliates comprise foreign (EU and non-EU) controlled subsidiaries and foreign (EU and
non-EU) controlled branches.
ii) Cross-border bank lending via direct cross-border loans in the euro area seemed to
be on an upward trend. The share of cross-border loans to non-financial
corporations, which account for around 8% of all loans to non-financial
corporations, continued to grow, albeit at a slow pace
Figure 20 – Share of cross-border loans in the euro area by sector
155
Source: ECB (BSI statistics); Notes: Percentages per annum. Cross-border loans include loans to other euro area
countries for all maturities and currencies. Interbank loans do not include central bank loans.
It is important to note the importance of the cross-border dimension within the NPL problem.
Analysis in the Report of the FSC Subgroup on Non-Performing Loans133
shows that, as at
2016, foreign-owned banks faced somewhat lower corporate NPL problems than their
domestically owned peers across EU Member States. Nevertheless, the extent of the NPL
problems remains significant even for these foreign-owned entities, especially given that the
observed NPL differences might be due to a conservative selection of corporate counterparties
by foreign-owned banks precisely due to differences in enforcement frameworks.
Better cross-border out-of-court collateral enforcement rules and more predictability can have
a positive effect on lending (both cross-border and domestic) in these three cases:
 Direct cross-border lending (i.e. Italian bank lending to Spanish corporate on a secured
basis with Spanish collateral)  cross border lending and cross border enforcement
 Indirect cross-border lending through a subsidiary (i.e. Italian group with a Spanish
subsidiary lending to a Spanish corporate on a secured basis with Spanish collateral)
 this is considered cross-border lending but the contract and the collateral
enforcement are not cross-border as these are all in Spanish; however the headquarters
of banking groups still exert significant control on the overall lending activity of the
subsidiaries: in this simplified example the Italian group trusting the out-of-court
collateral enforcement in Spain (as similar to the Italian one thanks to an harmonized
system) will channel more money to the Spanish subsidiary hence increasing cross-
border lending
 Small Italian bank (so no subsidiaries or foreign holding companies above) lending to
a Spanish corporate on a secured basis with Belgian collateral  this is considered
domestic lending but with cross border enforcement
V. (First-order) comparison of the efficiency of the judicial system
A first-order comparison of the efficiency of the judicial system in different countries can be
based on the World Bank Doing Business data, which are a series of annual surveys
measuring regulations and procedures that are essential for business activity. Among the areas
133
Report of the FSC Subgroup on Non-Performing Loans, EF 113 ECOFIN 481, May 2017.
156
included (latest data current as of June 1, 2016) is the ability to enforce contracts which is
related to the efficiency of the judicial system (and ultimately reduces the risk of insolvency
and related litigations). The graph below shows how the EU as a region fare compared to
other extra-EU regions and the situation in the 28 Member States on the number of days
required to enforce a contract through courts including i) time to file and serve the case; ii)
time for trial and to obtain the judgment; iii) time to enforce the judgment. Although the
indicator is based on the number of simplifying assumptions and on hypothetical test case (the
dispute of the breach of a sales contract between 2 domestic businesses134
) it can used as
useful indicator of the efficiency of the judicial system and can be compared across 190
economies.
In terms of time to enforce a contract, the EU as a region is performing worse than the OECD
high income countries, with four Member States (Greece, Slovenia, Italy and Cyprus) well
above the average. The latter have estimated values of more than 1100 days (i.e. 3 years).
Incidentally these are also the countries with the highest level of NPLs. Conversely the
Member States at the far right of the chart (i.e. those with the fastest enforcement procedure)
are among those with the lowest level of NPLs.
134
Although the judicial enforcement of collateral is a different case compared to a dispute of the breach of a
sales contract many procedural steps are common for both making the indicator also a good proxy for the former.
157
Figure 21 – Number of days needed to enforce a contract trough the courts
Source: Doing business 2017
158
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