Carving out legacy assets: A successful tool for bank restructuring?

Transcription

1 1 Carving out legacy assets: A successful tool for bank restructuring? Lisbon University of Law 8 May 2017 Willem Pieter de Groen Centre for European Policy Studies (CEPS)

2 Non-performing loans (NPLs) potential threat for EU banks 2 80% 70% EU banks are facing >1 trillion NPLs 60% 50% 47% 47% 40% 30% 20% 10% 20% 16% 16% 14% 13% 13% 11% 11% 7% 6% 5% 5% 5% 4% 4% 4% 3% 3% 3% 3% 3% 2% 2% 1% 1% 1% 0% GR CY PT IT SI IE BG HU RO HR PL ES AT SK MT LT FR LV BE DK DE NL CZ UK FI EE LU SE Source: EBA (Sept-2016) NPL Ratio Coverage ratio of NPLs

3 Non-performing loans (NPLs) potential threat for EU banks GR CY HR IT PT IE SI BG HU RO Source: ECB

4 Market failures NPLs 4 NPLs Inefficient judicial systems Information asymmetry (buyers and sellers) Pricing problem (inefficient markets) Incentives for banks to postpone loss taking Loss provisions Cost of capital, etc. Market failures Management costs Book value Economic value Market value Resolution tools

5 Secondary market NPLs Secondary market for loans is relatively small in the EU ( 280bn) Loan sales in Europe 2015/ ,7 19, , ,3 13,3 22,9 2,3 0,3 17,3 14 7,5 11,8 4,2 6,4 3,1 5,3 2,2 2,1 1,6 2,3 1,3 0 IT UK IE ES DE NL AT & CEE PT GR Ongoing Source: Deloitte

6 Policy responses 6 Enhance bank supervision Proper accounting of NPLs Harmonization of NPL definitions (EBA) Enhanced disclosure on exposures Guidance for banks to develop NPL strategy (ECB) Improving the legislation and procedures Reforms of insolvency law and procedures Shorten time between financial distress and liquidation Tax reforms to encourage banks to recognize losses sooner Carving the NPLs out of the banks books Creating secondary market Set-up asset management company, corporate restructuring and securitization

7 Data description 7 Sample 79 euro area banks All received capital support from government Data sources: State aid: DG Competition decisions Financial: Annual reports

8 Main causes capital shortfalls? 8 Legacy assets incl. NPLs main issue during sample period Non-financial assets (6%) Operational (1%) Financial assets - Securities (23%) Financial assets - Loans/Securiti es (17%) Financial assets - Loans (52%)

9 Resolution tools used 9 Total: 79 Aided banks None (17) Sale of business (part) (24) Bridge bank (15) 10 Sale of business (entire) (12) (28) Asset separation 11 Other (9) 3 1

10 Effectiveness: Long-term viability 10 Return on risk-weighted assets after first intervention ( ) 10% 5% 0% -5% T0 T1 T2 T3 T4 T5 T6 T7 T8-10% -15% -20% -25% None Sale of business (entire) Other (Guarantees) Sale of business (part) Bridge bank Asset separation

11 Effectiveness: Financial and economic stability 11 Loan growth after first intervention ( ) 10% 5% 0% -5% T0 T1 T2 T3 T4 T5 T6 T7 T8-10% -15% -20% -25% None Sale of business (entire) Other (Guarantees) Sale of business (part) Bridge bank Asset separation

12 Risk weighted assets Effectiveness: Cost of measures 12 Costs and capital consumption ( ) 30% 20% Capital injection 10% 0% -10% -20% -30% Regulatory capital before injection Cumulative losses (peak) Net value -40% None Sale of business (entire) Other (Guarantees) Sale of business (part) Bridge bank Asset separation Immediate deleveraging (T0-2) On balance sheet Carve-out

13 Effectiveness of resolution tools 13 On-balance sheet Carve-out None Sale of business (entire) Other (Guarantees) Sale of business (part) Bridge bank Asset separation Transfer value Book Market Economic Market Book Economic Long-term viability Economic and financial stability Unchanged Improves Improves Improves Improves Improves Unchanged Improves Improves/ Deteriorates Improves Improves Improves/ Deteriorates Loss Low High Medium High Low Medium Capital required Yes No No No Yes No Liquidity Bank Bank Bank No Bank Non-bank Management - strategy Internal Mixed Internal Mixed Internal External - accounting Annually Up front Annually Up front Annually Up front Moral hazard No No Yes No No No

14 Conclusions & policy remarks 14 NPLs risk for banks in several EA countries Bail-in makes it even more important to minimize the the total losses Avoid direct sales (sale of business [part or entire]), which have the highest expected losses No resolution tools option for small portfolios of NPLs and sufficient margins Other tools option for effective resolution, though all have some disadvantages (guarantees [moral hazard], bridge bank [capital], asset separation [liquidity]) Remaining questions on impact of internal or external management of legacy assets Liquidity facility needed for some resolution tools (e.g. asset separation)

15 References: Groen, W.P. (2017), Carving out legacy assets: a successful tool for bank restructuring?, In-Depth Analysis, European Parliament, Brussels. 15 Contacts: Willem Pieter de Groen (+32) willem.pieter.degroen@ceps.eu willem-pieter.de-groen@hec.ca Disclaimer: Unless otherwise indicated, the views expressed are attributable only to the author in a personal capacity and not to any institution with which he is associated. CEPS Willem Pieter de Groen.