Avis du CESE sur la stratégie de la Commission euroopéeenne visant à prévenir l'accumulation future de prêts non performants (PNP)

The European Economic and Social Committee (EESC) welcomes the Commission's new Action Plan on non-performing loans, but believes that it lacks new proposals fit for COVID-19 times, leaving Europe to face an extraordinary time with rules written for ordinary times.

In an opinion adopted by the plenary assembly on 25 March, the EESC has analysed the strategy for tackling non-performing loans (NPLs) by taking into account all stakeholders affected by this phenomenon. The European Commission has set out its main concerns about specific sectors of the economy, such as banks, credit purchasers, credit servicers. However, the EESC has outlined the point of view of wider European society, because NPLs have severe consequences on the economy as a whole, and on the lives of people.

The root causes of NPLs

The EESC cares a lot about the stability of the banking sector, said the opinion's rapporteur, Kęstutis Kupšys. But we also care about businesses that are indebted and cannot pay their debts anymore, as well as viable businesses that may need additional money from the banks. When writing this opinion, we also had in mind vulnerable citizens, who are indebted and are about to become victims of 'vulture funds'. Finally, we had in mind all taxpayers:  when, or rather if, public funds are allocated to buy portfolios of NPLs, they are the ones who pay to save banks from bad debts.

The EESC recommends tackling first and foremost the root causes of NPLs in order to prevent their build-up in the future. The most effective way to avert the build-up of high volumes of NPLs is to ensure constantly improving competitiveness, focusing on business continuity and economic recovery, while building solid social security systems, combating poverty, over-indebtedness and unemployment, guaranteeing adequate wages and implementing countercyclical economic policy measures in times of crises.

NPLs in COVID-19 times

Given the impact coronavirus has had on the EU's economy, the volume of NPLs is expected to rise across the EU. In order to mitigate the negative consequences, the EESC calls for relief measures for credit institutions to go hand in hand with government aid measures for borrowers who have only become distressed as a result of the pandemic. Among the measures that should be used in this situation are deferrals with maturities of one to three years, interest rate rebates, restructuring of debt to less expensive forms of credit and moratoria on loan repayments, where possible. The EESC is in favour of this internal workout process.

It also suggests a careful, targeted and strictly temporary review of the European Banking Authority (EBA) guidelines on the definition of default and recommends that guidelines on credit moratoria stay in place as long as needed. This would ensure a "soft landing" for European households and businesses. More specifically, "pre-COVID-19" NPLs should be dealt with in a very different manner to "post-COVID-19" (or COVID-19-induced) NPLs.

Cross-border NPL markets and AECE

In its communication on the new strategy, the European Commission proposes further developing secondary markets for distressed assets. The EESC believes that the need for a pan-EU, cross-border NPL market is overstated. It is dangerous to provide an EU-wide operating "passport" to debt collectors without proper supervision from both their "home" and "host" countries. This move could only be justified if there is a counterbalancing set of measures helping protect distressed borrowers: an EU-wide consumer protection standard for debt collectors.

Moreover, it is highly questionable whether the cross-border operations of credit purchasers provide tangible economic benefits for the economic system overall, and not just for banks, credit purchasers and credit servicers.

Another pillar of the action plan is the legislative proposal for minimum harmonisation rules on accelerated extrajudicial collateral enforcement (AECE), which is strictly limited to corporate loans and applicable only if a prior voluntary agreement between the parties has been achieved when concluding the loan contract. The EESC notes that AECE could provide a balanced solution for debtors, but demands that extra-judicial enforcement does not become a default option in loan contracts.

NPLs and "bad banks"

When it comes to selling NPLs to asset management companies (AMCs, also colloquially referred to as "bad banks"), the EESC believes that this should remain the exception. Preference needs to be given to bilateral workout agreements between the credit institution and the borrower, in which case the solution should be focused on business continuity and economic recovery.

"Debts should not become a commodity"

According to Kęstutis Kupšys, the European Commission's document deals narrowly, in technocratic terms, with an issue that affects many sections of society "on the ground", which the EESC represents. We have tried to go beyond numbers and paragraphs, he commented. The message we want to convey is that the NPL issue should not be fused with issues related to preserving financial stability. All in all, we see the proper way to deal with NPLs as being inside the banks, not just by dropping them on to the market when the loans become shaky. Debts should not become a commodity!

Background

The European Commission's NPL Action Plan, announced in December 2020[1], is intended to prevent a future build-up of NPLs across the European Union as a result of the COVID-19 crisis. A loan becomes non-performing when it is unlikely to be repaid, or when the borrower is 90 days late on a payment. Due to the pandemic, the European Central Bank estimates that in a severe scenario with a much weaker and protracted recovery, the sum of NPLs held by euro area banks could reach "up to EUR 1.4 trillion".