In September, guidelines on best practices and conditions for successful transactions of non-performing loans (NPLs) on secondary markets – drafted by the European Commission, in cooperation with the Commission’s NPL Advisory Panel – will be published. Nicolas Willems, Policy Officer responsible for NPL-related matters at the European Commission, answers some questions about the guidelines – why they were necessary, and what benefits they will bring.

Why were the guidelines needed?

In the context of the Covid crisis, the Commission issued in December 2020 an action plan on “Tackling NPLs in the aftermath of the COVID-19 pandemic”. This action plan aims to provide banks with more effective tools to address NPLs in their balance sheets, and in particular outlined targeted action to improve secondary markets for NPLs.

The further development of secondary markets for distressed debt is a key objective in this regard. Deep and sound secondary markets for distressed assets are important for banks, as they more easily, and at more competitive conditions, can reduce their NPLs by selling them to third parties. This is equally important for the entire EU financial sector, as its shock resilience is thereby increased. If banks are better able to off-load non-performing assets from their balance sheet via secondary markets, this helps them focus on their lending activities, free up space in their balance sheets for new lending and therefore enable them to fund the economic recovery.

The objective of the guidelines is to encourage good sell- and buy-side processes for NPL transactions in EU secondary markets, and, in particular, to give advice to sellers and buyers who may have less experience with secondary market transactions. The dissemination of good practices on NPL transactions among sellers and buyers clarifies what steps market participants in general have to take to achieve such transactions, and it fosters the improvement of market standards.

What do the guidelines recommend?

The guidelines are based on best practices and set out the conditions to be met and the sequence of main activities to be performed in preparing and conducting a competitive sale of NPLs. They aim to encourage good ‘sell and buy side’ processes for such transactions and, in particular, to help often smaller sellers and buyers who may have less experience with these transactions. The guidelines could become a market practice standard for all institutions engaging in sales of NPLs, and consequently also reflect the perspective of bigger organisations.

Throughout all the different phases of the transaction process, the guidelines provide clear suggestions for an efficient and effective approach, in order to secure a successful outcome. They illustrates in detail the main process and materials that are provided to external investors in standard market transactions. Considering the significant importance of sharing relevant data and information, the guidelines include suggestions specifically on the scope of disclosure in the respective phases. They also point to certain steps that are more important for a specific type (and in certain cases a specific size) of transaction and/or asset class.

How will they help?

The guidelines should bring a number of benefits for EU secondary markets: they can enable more standardisation of processes, increase efficiency and transparency of the timeline of transactions, and improve market practices in Member States, in particular where secondary markets are less developed. The publication of these guidelines is an important step in our broader efforts to improve the functioning of EU secondary markets for NPLs, which, in turn, will further foster financial stability in the EU at large.

Read more about non-performing loans (NPLs)