How Asset Management Companies Can Help Tackle the NPL Crisis – a State Aid Perspective within the Resolution Framework

Abstract

The lingering pandemic and associated lockdown measures have undoubtedly an impact on banks’ balance sheets. It is expected that the ratio of banks’ non-performing loans (NPLs) will raise significantly once Member States fully unwind the support measures introduced to contain the impact of the pandemic on businesses and households. This article investigates the merits of the Commission’s proposal to make use of Asset Management Companies (AMCs) to tackle old and new generations of NPLs in the aftermath of the COVID-19 crisis. It identifies and compares the different sets of rules applicable to different scenarios under which an AMC could be used to offload NPLs from banks’ balance sheets, drawing also on historical experience during and after the Great Financial Crisis. These scenarios include the use of an AMC (1) outside of resolution without the award of State aid; (2) outside of resolution with the award of State aid (‘precautionary recapitalisation’); (3) in resolution to operationalize the asset separation tool; and (4) in national insolvency proceedings (with or without the award of State aid). The article finds that the rules that apply to these different scenarios are not always coherent and that a common understanding on the eligibility of assets to be transferred to AMCs is needed to effectively tackle an upcoming NPL crisis.

Keywords: non-performing loans, NPLs, COVID-19 crisis, State aid, asset management companies, AMCs

JEL Classification: G18, G21, K21, K23