FRANKFURT (Reuters) - The European Central Bank called on Monday for the creation of a private sector platform to trade in soured bank debt, hoping to kickstart a dysfunctional market weighing on the bank sector.
Euro zone banks are sitting on around 800 billion euros worth of non-performing loans (NPL).
The ECB has made it a top priority to tackle the issue as these bad debts, now too difficult to swiftly move off lenders’ balance sheets, are holding back lending and limiting the effectiveness of the ECB’s policy stimulus.
It has recently proposed tougher provisioning guidelines on new NPLs and said it would come up with new rules on older bad debt, drawing fierce opposition from the most affected countries, such as Italy.
A possible solution to NPLs would be the creation of a single platform that acts as a data warehouse for bad debt, a transaction system and a trade data repository, the ECB said in an article that forms part of its biannual Financial Stability Review.
The platform would increase transparency, reduce transaction costs, improve coordination in the case of multiple creditor claims and open the market to new investors, the ECB argued.
“Wider investor participation may have a number of important benefits that result in lower bid-ask spreads: price competition in the market may be increased and investors with lower risk tolerance may enter the market,” the ECB added.
The private sector could be given incentives, including tax credits, to set up such a platform, but state participation is unnecessary, the study concluded.
“The role of the authorities in setting up an NPL platform should essentially be limited to regulation, support during the start-up phase and incentivising participation,” the ECB added.
“It is not necessary, and for governance reasons not even preferable, that the state takes an ownership stake in the platform.”
To work, the platform must provide equal access and must not have monopolistic powers, the study added.
Such a platform may also require changes in data protection rules and must ensure that private data, whether about individual borrowers or about the asset quality of a certain bank, is kept sufficiently confidential.
Reporting by Balazs Koranyi; Editing by Hugh Lawson