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Abstract
We propose a comprehensive, pan-European scheme to address the issue of non-performing exposures. We contend that securitisation is the most effective way to sell the bulk of troubled loans because it can rise the transfer price at a level closer to the real economic value, reducing the loss for the banks at bearable levels. Through a numerical example, we describe the main characteristics of a blueprint of securitisation to be implemented at a national level. We argue that this scheme could attract funds from a wide array of investors, while forms of public support can be worked out in terms compatible with the current European rules on state aid.
1.Why securitisation is the best way to get rid of European NPLs
The poor quality of banks' loan portfolios seems to be at present the main unresolved issue in Europe. Non-performing loans (NPLs) in the Eurozone stand above €1 trillion; nothwitanding the discrepancies acroos banks and countries, more than one third of EU jurisdictions have NPLs ratios above 10% (EBA 2016). Such a bulk of NPLs is likely to have micro and macro-prudential effects. NPLs may impair the lending channel - therefore the transmission mechanism of monetary policy - due to the negative impact on banks' profitability, capitalisation, and funding costs (ECB 2015). The low quality of loan portfolios can also revive the "diabolic loop" between banks and sovereigns, which forced the ECB to deploy ultra-accomodative monetary policies whose side effect is to depress banks' net interest margin. Given the high interconnectedness within the Euro area financial system the risk of spillovers across banks and countries can also rise (ECB 2015; IMF 2016).
The issue has been so far left to national initiatives, as the European commission and Parliament, that avoided to adopt a comprehensive approach, pretending not to see the elephant in the room.
Since the inception of the financial crisis, many economists warned that a prompt and bold solution to improve the quality of banks' assets was necessary (Spaventa 2008); others pointed to the example of the successful restructuring of the Nordic after the banking crisis of the early '90s (Borio et al. 2010). The response of the European and national authorities has not been up to these proposals and recently the...