On 16 December 2020 the European Commission unveiled a strategy to prevent a future accumulation of non- performing loans ("NPLs") on banks' balance sheets across EU member states as a result of the Covid-19 pandemic (the "NPL Strategy"). The core objective of the NPL Strategy is to support a liquid secondary market for NPLs so that banks are in a position to continue to lend through the post Covid-19 recovery.
A high volume of NPLs on banks' balance sheets would inhibit their ability to lend as a result of the obligation placed on financial institutions to hold capital against such vulnerable exposures under the Capital Requirements Regulation No. 575/2013 ("CRR"). The amount of distressed loans across the EU is expected to rise in 2021 after the expiration of (i) mortgage repayment holidays for private individuals and (ii) temporary relief measures for companies, which were introduced when member states went (or returned) into lockdown.
In this publication we will first summarise the main elements of the NPL Strategy before providing some analysis on certain of the proposals together with some market reaction.
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Originally published 12/03/2021
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