ECO/540
Tackling non-performing loans in the aftermath
of the COVID-19 pandemic
OPINION
Section for Economic and Monetary Union and Economic and Social Cohesion
Communication from the Commission to the European Parliament, the Council and the European Central Bank
Tackling non-performing loans in the aftermath of the COVID-19 pandemic
[COM(2020) 822 final]
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Administrator
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Krisztina PERLAKY-TOTH
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Document date
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17/03/2021
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Rapporteur: Kęstutis KUPŠYS
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Referral
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European Commission, 24/02/2021
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Legal basis
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Article 304 TFEU
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Section responsible
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Economic and Monetary Union and Economic and Social Cohesion
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Adopted in section
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10/03/2021
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Adopted at plenary
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DD/MM/YYYY …
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Plenary session No
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Outcome of vote
(for/against/abstentions)
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1.Conclusions and recommendations
1.1The EESC welcomes the presentation of the new Commission Action Plan (communication) on non-performing loans (NPLs), but regrets that it essentially lacks new proposals fit for COVID-19 times, leaving Europe to face an extraordinary time with rules written for ordinary times. As such, the EESC recommends tackling first and foremost the root causes of NPLs in order to prevent their build-up in the future, and also proposes a careful review and temporary adaptation of the definition of default, ensuring a "soft landing" for European households and businesses.
1.2Tackling the root causes of NPLs is paramount. The EESC stresses that the most effective ways to avert the build-up of high volumes of NPLs by households and SMEs alike are: ensuring that we strive constantly to improve competitiveness, building solid social security systems, combating poverty, over-indebtedness and unemployment, guaranteeing adequate wages and implementing countercyclical economic policy measures in times of crises. Through these steps, we can achieve financial market stability and economic resilience, whilst tackling poverty and massive inequality at the same time.
1.3The EESC argues that "pre-COVID-19" NPLs should be dealt with in a very different manner to "post-COVID-19" (COVID-19-induced) NPLs due to the completely different circumstances before and after March 2020. The EESC accordingly suggests a careful, targeted and strictly temporary review of the EBA guidelines on the definition of default. The EESC also recommends that the EBA Guidelines on credit moratoria stay in place as long as needed.
1.4The EESC calls for relief measures for credit institutions to go hand in hand with governmental 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.
1.5The EESC notes that the need for a pan-EU, cross-border NPL market is exaggerated. Therefore, the Committee is concerned with plans 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. The EESC notes that there are too many "ifs" to be observed, until real debtor protection is made a reality.
1.6Another pillar of the Action Plan – the proposal for accelerated extra-judicial collateral enforcement (AECE) – may prove counterproductive if extra-judicial enforcement becomes a norm, a default option in the loan contract. It should be ensured that distressed businesses do not lose access to the standard judicial system with its checks and balances, developed on the basis of age-long tradition.
1.7The EESC strongly urges against fusing the NPL issue, reflecting a widespread phenomenon in the economy, with an issue concerning the rescue of a particular group of distressed banks in some Member States. To maintain the moral and operational integrity of the banking sector, these two issues should be addressed separately.
1.8The EESC calls for the option of selling NPLs to asset management companies (AMCs, which are also colloquially referred to as "bad banks") to remain an exceptional case and for preference 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. The EESC highlights that any use of "precautionary recapitalisation", if funded with public money, is likely to divert public funds away from other more socially and economically useful aims. The EESC also underlines the need for any "precautionary" measures to be used in a highly responsible manner, in order to avoid moral hazards and bank bailouts at society's expense by using public money.
1.9In light of the current situation, where potentially viable businesses might run into payment difficulties in spite of their "pre-COVID-19" creditworthiness, the EESC suggests a careful review of EBA guidelines on the definition of default, which could give COVID-19-induced distressed debtors a chance to recover before their loans are considered non-performing. However, the EESC stresses that any such changes must be strictly temporary, they should not interfere with detailed and accurate identification and reporting of credit risk by banks and they should be done in accordance with the fundamental need to ensure the stability and solvency of the banking sector.
1.10The EESC broadly recommends that capital requirements – including the NPL backstop regulation – be kept firmly in place. This will ensure that banks have full capacity to withstand losses and will decrease the likelihood of future public interventions (such as "precautionary recapitalisation") and bank bailouts at the taxpayer's expense. However, temporary flexibility on the definition of default should be provided in order to mitigate the effects of the COVID-19 crisis.
2.Background
2.1The European Commission's NPL Action Plan, announced in December 2020
, 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"
.
2.2In July 2017, the Action Plan to Tackle Non-Performing Loans in Europe was unveiled, and, in the course of a few subsequent years, it helped to address and reverse the build-up of NPLs in banks. A subsequent Communication on completing the Banking Union followed.
2.3In March 2018, the European Commission introduced a legislative proposal to spur on the development of the secondary market of NPLs in the EU. The draft directive should help banks sell their NPL portfolios easily to third party investors anywhere in the EU. The proposal also introduces an out of court enforcement procedure called "accelerated extra-judicial collateral enforcement". The draft directive is still a work in progress, although the two issues have been detached in separate legislative acts.
2.4With the outbreak of the COVID-19 pandemic, the Commission reacted swiftly by enacting measures to help the banking sector deal with the expected and upcoming NPL build-up. The Banking Package in April 2020 has already provided substantial short-term support to the banking sector, including rules on how banks assess the risk of a borrower not able to repay the loan, or prudential rules for the classification of non-performing loans, and the accounting treatment of delays in repayments. Banks have also been benefiting from significant liquidity support measures (ECB Pandemic Emergency Purchase Programme
and the easing of conditions for targeted longer-term refinancing operations, TLTRO III, in March 2020). Now it is time to think about the solvency levels of European firms.
2.5The accompanying Capital Markets Recovery Package provided the banking sector with further support by removing regulatory obstacles to the securitisation of NPLs.
2.6In recent months, the European banking sector has benefited from regulatory relief and liquidity support measures aimed at safeguarding financial and economic stability and supporting European households and companies. Consequently, the banking industry has continued to lend to their clients and no credit crunch has occurred.
2.7Member States have also taken decisive action, with support schemes to alleviate liquidity difficulties affecting households and businesses. These schemes typically involve public guarantee schemes and/or payment deferrals ('moratoria'). These measures help borrowers with temporary liquidity problems and prevent an immediate surge in non-performing loans (NPLs). The Commission has also adopted a Temporary Framework to enable Member States to use the full flexibility provided for under State aid rules to support the economy during the COVID-19 outbreak.
3.General comments
3.1The EESC notes that the current Commission Action Plan (communication) follows and reiterates the same measures already contained in the 2017 plan. It essentially lacks new proposals fit for COVID-19 times, leaving Europe to face an extraordinary time with rules written for ordinary times. The EESC argues that "pre-COVID-19" NPLs should be dealt with in a very different manner to "post-COVID-19" (COVID-19-induced) NPLs due to the completely different circumstances before and after March 2020. The EESC accordingly recommends a careful, targeted and strictly temporary review of the EBA definition of default, to avoid the automatic classification of debtors as defaulted and to mitigate the procyclical effects of the current regulation and ensure a "soft landing" for European households and businesses.
3.2Moreover, in general the main problem for SMEs tends not to be a lack of access to financing, but rather the difficulty of finding customers, as shown in surveys published periodically by the ECB. Also, in the middle of the pandemic, euro area SMEs reported that difficulty in finding customers was the main concern for their business activity, while access to finance was considered to be among the least important obstacles.
3.3The EESC consistently advocates for non-performing loans to be reduced in a socially sustainable way while preserving financial stability. During COVID-19 times, this is now more important than ever. In contrast to what happened a decade ago during the 2008-2009 financial crisis, the current expected NPLs surge is not the fault of the financial sector or any other specific category of players within the economic system, but it is not the fault of the "real economy", governments or European citizens either. The intervention of EU-level regulators and Member States' governments with the right tools is critically important.
3.4While the EESC acknowledges that there are certain advantages to developing secondary markets for NPLs, the Committee would favour bilateral workout agreements between the credit institution and viable borrowers. Although NPL volumes on banks' balance sheets can be reduced via sales to credit purchasers, this does not mean that NPL sales are optimal from a borrower's perspective or for a society as a whole. NPL sales should be a last-resort solution.
3.5Tackling the root causes of NPLs is paramount. The EESC stresses that the most effective ways to avert the build-up of high volumes of NPLs by households and SMEs alike are: ensuring solid social security systems, combating poverty, over-indebtedness and unemployment, guaranteeing adequate wages and implementing countercyclical economic policy measures in times of crises, while enhancing productivity and the competitiveness of the European economy with a clear and updated regulatory framework that gives visibility to long term investments. Through these steps, we can achieve financial market stability and economic resilience, whilst tackling poverty and massive inequality at the same time.
3.6In the EESC's view, the Action Plan reflects the basic logic that nowadays banks act as an essential infrastructure in the monetary-flow-based economy in Europe, and that the health and stability of the banking sector is a necessary prerequisite for economic recovery. As the Commission puts it in the related communication, "making sure that European citizens and businesses continue to receive support from their banks is a top priority for the Commission". In this context, the EESC points to the decisive role of the ECB in safeguarding banks' stability and credit supply, and notes that the European economy is supported by measures that are intended to ensure that lending would be provided to solvent credit demand.
3.7The EESC notes that reliable data on NPLs are partially missing and that much uncertainty remains as to the future of COVID-19 vaccination, SARS-CoV-2 virus mutations (COVID-19 variants), lockdown measures and economic recovery. The EESC stresses the importance of data quality to properly assess the extent of the problem and the identification of viable firms. The EESC, therefore, calls for caution and for measures that could get the European economy back on its feet quickly, such as measures to support small businesses and to guarantee adequate wages and solid social security systems. The EESC points out that banking sector deposits have increased substantially, which means that there is good potential for consumer demand in the months following the lifting of lockdown restrictions.
3.8It remains to be seen how firms and households which "have come under significant financial pressure due to pandemic", can be assisted by banks ("receive support from their banks") if the rise in NPLs is addressed. The proposed changes or regulatory easing are currently not conditional on banks' lending to solvent SMEs or households. The EESC regrets that, except for the banking sector, the Commission's Action Plan provides few new measures to help ailing economic actors. In the face of the external economic shock making many workers and companies even more dependent on loans, such additional measures should be found and be subject to banks lending to solvent SMEs and households. At the same time, authorities should establish adequate safeguards to prevent irresponsible lending and subsequent over-indebtedness.
3.9The EESC recommends acknowledging the civil society as a whole as stakeholders in the field of financial market regulation. In particular, with regard to tackling of NPLs in the aftermath of the pandemic, NPLs have several impacts, also affecting, for example, workers' interests in their role as debtors, employees in indebted companies, financial sector employees or taxpayers (especially relevant in the case of public funds being used to tackle NPLs).
3.10The EESC notes that the need for a pan-EU, cross-border NPL market is exaggerated despite the fact that the banking sector is steadily moving towards an EU-wide Banking Union. 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 (while it is true that the latter may definitely gain from economies of scale). Insecurity that borrowers will associate with the cross-border debt business model may lead not to an increase, but to a decrease in demand for new loans. The widening of the investor base is another highly critical premise pushed by the Commission. With a majority of purchasers of European non-performing debt since 2014 coming from outside the EU, it is easy to foresee who will gain the most at the expense of European businesses and consumers.
3.11In that context, the EESC also underlines that spreading the risk does not lead to a reduction of it. On the contrary, the 2008-2009 financial market crisis taught us that this may lead to a non-transparent accumulation of risk and to lump sum risk. The EESC urges that the objective of all measures dealing with incentives for the financial sector should be to discourage market players from taking too much risk. The EESC notes, that the framing of the NPL issue in the Commission's Action plan is going in the opposite direction.
3.12At the same time, the EESC highlights that it is not credit purchasers and credit servicers who should be supported, but rather it is European businesses, workers and civil society that require resources and full support to withstand the crisis. Such assistance should be available over a period of up to three years (as per the Next Generation EU stimulus package) to support businesses and borrowers that were deemed healthy and creditworthy prior to the pandemic. Virtually the entire population of Europe is affected by the rising socio-economic insecurity. Businesses experience disruption due to forced closures and reduced demand, while households are confronted with unemployment and a fall in income. The EESC believes that European citizens and businesses would need an entirely different kind of measures and obviously not the fast enforcement of the NPL framework as the Commission proposes.
4.Specific comments
4.1The Commission is convinced that the agreement on the proposal for a directive on credit services and credit purchasers, in essence creating a common secondary market for NPLs, is a top priority. The EESC is concerned with plans 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. The EESC is also concerned that the proposal for a directive on credit servicers and purchasers would prevent states from enacting any other or further requirements for credit servicers and purchasers, even if such requirements were deemed to protect debtors. If "home" and "host" supervision is ensured, consumer protection rules are observed, "best practice" guidelines are provided via the EBA and a uniform approach to such activities is envisaged, most of the issues raised here would be addressed. However, the EESC notes that there are too many "ifs" to be observed, until real debtor protection is made a reality.
4.2The EESC notes that certain credit purchasers and debt collectors have a bad reputation – hence why some credit purchasers are called "vulture funds" – and underlines that providing the EU-wide operating "passport" to debt collectors without proper supervision from both their "home" and "host countries, and without proper "best practice" guidelines being implemented in a timely and effectively manner throughout EU, might lead to improper business conduct by such credit purchasers or credit servicers, to the detriment of distressed borrowers. The EESC also highlights the need to ensure that the proposal for a directive on credit servicers and purchasers does not prevent states from enacting additional legal requirements for credit servicers and purchasers, thus guaranteeing that the "gold-plating" principle is observed properly in this case.
4.3In addition, some credit purchasers are known to have tax avoidance issues. For example, in Ireland, some of them are registered as charities and pay almost no taxes. The EESC calls on the European Commission to step up its efforts in tackling the issue of tax avoidance.
4.4Another pillar of the Action Plan is related to the proposal for AECE – accelerated extra-judicial collateral enforcement –, 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 acknowledges that households (private consumers) are excluded from this procedure. However, in the EESC's view, AECE may prove a counterproductive measure if extra-judicial enforcement becomes a norm, a default option in the loan contract. It should be ensured that distressed businesses are not left helpless and do not lose access to the standard judicial system with its checks and balances, developed on the basis of age-long tradition. In the EESC's view, systematic collateral recovery delay issues should be dealt with on a country-by-country basis, by carrying out well-prepared reforms and with targeted interventions by Member States where bottlenecks persist.
4.5The EESC agrees with Commission's statement that "[...] banks should be incentivised as much as possible to apply a proactive approach to engage with their debtors early and constructively", as this will avoid harming viable firms and ensure business continuity. However, the Committee calls on the Commission to put forward tangible measures to deliver on this vital objective.
4.6The EESC welcomes the initiative to further converge the various insolvency frameworks across the EU and notes that such convergence is beneficial not only for the banking business but for the whole entrepreneurial landscape in Europe overall. Such a convergence should not necessarily be tied to the NPL issue. It should be noted, however, that this measure will not help in the short term and will not provide much help in the aftermath of the COVID-19 crisis. Certainty over rules regarding creditor and debtor rights and greater harmonisation of collateral removal procedures across Member States will reduce risks and provide further impetus for cross-border investments and internal trade. The EESC stresses that when reforming insolvency frameworks, due consideration should be given to borrowers.
4.7The EESC points out that the secondary market for NPLs in no way helps businesses flourish, nor does it sustain jobs or allow closed undertakings to reopen. For businesses to re-start, targeted state-funded measures are fundamentally important. The EESC warns that excessive and irresponsible lending to an economy suffering from an unprecedented loss of output due to COVID-19-induced lockdowns is not a sustainable solution.
4.8However, the proposal the Commission is pushing for – the pan-EU secondary market and, to a lesser extent, AECE – raises fears that a single secondary market for NPLs in Europe will open up room for abuse and leave bank customers vulnerable to "vulture funds", the majority of which are not of EU origin. The EESC recommends more transparency and proper rules so as to ensure that consumers are protected from abuses by credit servicers, credit purchasers or "vulture funds".
4.9Therefore, the EESC advocates that credit investors and debt collectors should not be given an EU-wide operating "passport" if they buy consumers' (private customers) NPLs. It has to be examined whether the SME sector debt should be exempted too.
4.10The emphasis on NPL data standardisation across the EU is welcome, but it is not sufficient given the task and, in principle, it is not very relevant. The EESC also notes that EU institutions and taxpayers should not bear the costs of creating efficient markets and improving the standardisation of NPLs with a view to easing their trading; these costs should be borne by market participants themselves as the main beneficiaries of NPL trading. If data transparency is required, then it is needed most in internal sales of NPLs to tackle irresponsible practices by some banks when NPLs are sold internally, within banking groups.
4.11National asset management companies (AMCs), widely advertised by the Commission's document, and which are also colloquially referred to as "bad banks", may and most likely will require public money. The EESC consequently urges each Member State to carry out an in-depth analysis of the use of public money for the creation of such AMCs, depending on the situation at hand in each Member State while respecting the state aid rules.
4.12The EESC strongly urges against fusing the NPLs issue, reflecting a widespread phenomenon in the economy, with an issue concerning the rescue of a particular group of distressed banks in some Member States. To maintain the ethical and operational integrity of the banking sector, those two issues should be addressed separately. The EESC believes that even though specific financial institutions' problems may be due to an overload of NPLs on their balance sheet, no justification should be given for rescuing non-viable banks with public money, using the AMCs model under the guise of "off-loading" bad NPLs, and believes that the issue of banks' crises management should be addressed as a whole. The EESC calls for the sale of NPLs to AMCs to remain an exception and for preference to be given to working out such loans on banks' balance sheets.
4.13Moreover, it is essential that the Commission should prevent public money from being used to bail out private banking interests time and time again. Saving a bank should not be perceived as having a value in itself; it is not the ultimate goal of economic policies. In the long run, repeated bank-saving campaigns, involving huge amounts of public money, could create a moral hazard and disturb the system of incentives embedded in the banking business. Hence, the EESC warns against any policy that results in the "privatisation of profits and socialisation of losses". Instead, banks should be incentivised to address their NPL issues internally and to better manage their loan portfolios; any kind of implicit or explicit government support will not help to tackle underlying balance sheet problems. The EESC acknowledges the existence of the Single Resolution Fund, which is funded by contributions from credit institutions. The sizing of the Single Resolution Fund to the right capacity would prevent public money from being used to bail out private banking interests, hence addressing the concerns of "privatisation of profits and socialisation of losses".
4.14The EESC strongly calls for efforts to be directed at completing the Banking Union, which would boast a resilient, adequately capitalised and, most importantly, self-sustaining banking sector. A balance has to be struck between risk sharing and risk reduction. Significant impact on public budgets and on taxpayers in the event of a crisis, whether at national or EU level, should be prevented. Thus robust minimum requirements for own funds and eligible liabilities (MREL) and effective anti-money laundering measures need to be implemented. Moreover, greater attention should be paid to the regulation of the shadow banking sector. It has to be ensured that risk is not transferred from well- regulated to less regulated financial market players. Moreover, attention should be paid to the regulation of any financial activity not conducted by a regulated entity, following the principle of "same risks, same activity, same regulation and same supervision".
4.15From the point of view of consumer protection, the aim of AMCs is clearly to maximise returns and efficiency by selling off loans to third party investors or realising the collateral, and this does not seem compatible with ensuring the right protection for household borrowers and ensuring viable repayment plans and a minimum living standard. The EESC recommends that the AMCs incorporate socially-oriented objectives into their policies.
4.16The EESC is worried that any use of "precautionary recapitalisation" is likely to divert public money away from more socially and economically useful aims. As such, the use of "precautionary recapitalisation" should remain absolutely exceptional in the context of COVID-19. The EESC underlines the need for any "precautionary measures" to be used in a highly responsible manner, in order to avoid moral hazards and bank bailouts at society's expense by using public money. It is worth mentioning that financial stability is also a public good and therefore, financial regulators and supervisors should ensure that strong prudential rules are in place to avoid endangering the public good that is financial stability.
4.17The EESC notes the communication's assertion that the Recovery and Resilience Facility (RRF) can provide support "to reforms aimed at improving insolvency, judicial and administrative frameworks and underpinning efficient NPL resolution". RRF funds, as claimed by the European Council, should be used to "boost growth potential, job creation and economic and social resilience". Further explanation is needed to clarify the Commission's intentions in linking the RRF to NPLs, and to ensure that the RRF is not derailed from its original goal of fostering green and digital transition.
4.18In spite of the aims of the RRF agreed by co-legislators, not a single measure in the Commission's Action Plan is directed at ailing businesses in Europe – small and large, corporations and family businesses. In addition, the EESC notes that in the present communication, the Commission provides no tools to address how consumers struggling to pay their bills and make ends meet can survive the pandemic's effects and avoid sliding into a poverty trap. The EESC also points out other aspects that need dedicated action plans such as small and large corporations and family businesses suffering from the impact of the pandemic.
4.19The EESC recommends reviewing the following specific regulations:
4.19.1In light of the current situation, where many potentially viable business might run into payment difficulties in spite of their "pre-COVID-19" creditworthiness, the EESC proposes that a careful review of EBA guidelines on the definition of default (e.g. the number of days past the due date before a loan is considered non-performing; the Net Present Value threshold at which a restructured debt is considered "unlikely to pay" (UTP), etc.) might give such businesses a chance to recover before being considered non-performing. However, the EESC stresses that any such changes must be strictly temporary and related to the COVID-19 pandemic only, they should not interfere with detailed and accurate identification and reporting of credit risk by banks, and regulators and supervisors must balance any temporary change with the fundamental need to ensure the stability and solvency of the banking sector.
4.19.2The EESC recommends that the EBA Guidelines on credit moratoria stay in place as long as needed.
4.19.3In view of the fact that non-performing loans are non-performing no matter the reasons behind payment difficulties, and given that it is extremely difficult to ascertain which, out of the distressed borrowers, will in fact recover quickly once the pandemic is under control, -the EESC recommends that capital requirements – including the NPL backstop regulation, whose provisioning calendar already provides for very gradual increments in capital – should be kept firmly in place. However, temporary flexibility on the definition of default should be provided in order to mitigate the effects of the COVID-19 crisis. This would be a key factor to avoid firesales on NPLs by banks to the detriment of creditors, and enable banks to withstand losses, be they linked to the pandemic or to other factors, and will decrease the likelihood of public interventions and bank bailouts at the taxpayer's expense. In this context, the EESC notes and suggests taking into account the halt in Civil Courts and other delays in civil proceedings experienced throughout Europe.
4.19.4For banks able to provide evidence of a strong link to the real economy (a significant share of their assets relating to non-financial businesses and households), the EESC envisages that further flexibility could be granted. On the other hand, the utmost care must be taken in relation to globally systemic financial institutions that are prone to risk-taking and are highly interconnected with other financial market players.
4.20The EESC advocates that the Commission should propose reliable methods to ensure strict rules to protect distressed borrowers from unfair treatment:
4.20.1The EESC calls for relief measures for credit institutions to go hand in hand with 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.
4.20.2In order to stop irresponsible practices by some banks when NPLs are sold internally, within banking groups or to special purpose vehicles, additional transparency is needed. Special purpose vehicles (SPVs) might make a profit from a client's debt in a debt collection process but the client is left deeply in debt while the proceeds of the sale of collateral were converted to internal profits in the SPV.
4.21The EESC maintains the view that comprehensive measures to sustain a just and safe business climate should be provided, with particular emphasis on ensuring that the needs of the most vulnerable are met. The competitiveness of European businesses is built, first and foremost on a strong internal market, constant innovation and a predictable and socially responsible set of rules based on trust between economic stakeholders. The EESC warns against any legislative move that would treat non-performing loans as any other commodity. The EESC notes that such a move would not improve the environment of trust, but would, on the contrary, do more harm. It is imperative that a proper balance between borrowers' and creditors' rights is safeguarded.
4.22The COVID-19 pandemic is just one of many outside shocks. There are many more to come. Policy measures aimed at containing the extensive damage of such massive shocks should be based on principles that are universal and withstand the test of time. The EU strives to maintain its social market economy orientation and reiterates its promise to leave no one behind, while enhancing the competitiveness of the European economy. The EESC strongly urges that the Commission's action plans and legislative initiatives should take good care of these underlying principles.
Brussels, 10 March 2021
Stefano PALMIERI
The president of the Section for Economic and Monetary Union and Economic and Social Cohesion
_____________
APPENDIX
To the opinion of the Section for Economic and Monetary Union and Economic and Social Cohesion
The following amendments were rejected during the discussion but received over a quarter of the votes:
Point 3.3
Delete the point:
3.3
Moreover, in general the main problem for SMEs tends not to be a lack of access to financing, but rather the difficulty of finding customers, as shown in surveys published periodically by the ECB. Also, in the middle of the pandemic, euro area SMEs reported that difficulty in finding customers was the main concern for their business activity, while access to finance was considered to be among the least important obstacles.
Reason
The survey may no longer be relevant for the purpose of this opinion because it was taken in the middle of the pandemic, when the whole market was distorted, yet there was liquidity available. Moreover, difficulty in finding customers may trigger liquidity issues of the respective businesses which may have repercussions in accessing funding to bridge the gap. In addition, banks need to be prepared for the post-pandemic times, when NPLs might pile up and the funds available for financing the economy will be scarcer resource. Moreover, the subject of this opinion is not about the business continuity of the SMEs and the solutions thereof, but about the pilling up of loans (regardless of the quality of the debtor) and the relevant solutions. Thus, the statement lacks a clear connection with the object of the EESC opinion and it should be deleted.
Outcome of the vote
Votes against: 57
Votes in favour: 40
Abstentions: 3
Point 3.11
Delete the paragraph:
3.11
The EESC notes that the need for a pan-EU, cross-border NPL market is exaggerated despite the fact that the banking sector is steadily moving towards an EU-wide Banking Union. 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 (while it is true that the latter may definitely gain from economies of scale). Insecurity that borrowers will associate with the cross-border debt business model may lead not to an increase, but to a decrease in demand for new loans. The widening of the investor base is another highly critical premise pushed by the Commission. With a majority of purchasers of European non-performing debt since 2014 coming from outside the EU, it is easy to foresee who will gain the most at the expense of European businesses and consumers.
Reason
See comments from point 1.5. The text it is circumstantial and speculative. The cross-border aspect of the NPL is linked to the cross-border activity of the banks and other economic actors. Denying cross-border impact of NPL is nearing denying the cross-border activity of such players; an ailing financial system in a EU country due to high NPLs would have spill over effects in many other EU countries – discussion is only in terms of size eventually. Denying impact of credit purchasers in the NPL reduction or NPL reduction via sale to credit purchasers is groundless; we urge the rapporteur to have a look at the presentation provided by EBF to understand the size of the existing market of NPL sales and compare it, at historical moments, to NPL volumes to understand the effect of such sales in terms of financial system health and loan origination. We urge the rapporteur to provide data indicating that loan demand has decreased in countries where NPL sales have occurred (with or without buyer cross-border players). Moreover, passporting of credit purchasers and credit servicers is designed as a tool for EU actors not other actors. If "home"/"host" supervision is ensured, consumer protection rules are observed while "best practices" guidelines via EBA and uniform approach to such activity are envisaged to be made, most of the issues raised here are addressed or in process of being addressed already. If EESC wishes to express a concern, such should be in the sense of urging the EU institutions to ensure a high level of such protection measures as a norm. Besides, limiting the NPL market goes in the opposite direction to the EU single market and Banking Union, both supported by the EESC.
Outcome of the vote
Votes against: 49
Votes in favour: 40
Abstentions: 3
Point 3.12
Delete the paragraph:
3.12
In that context, the EESC also underlines that spreading the risk does not lead to a reduction of it. On the contrary, the 2008-2009 financial market crisis taught us that this may lead to a non-transparent accumulation of risk and to lump sum risk. The EESC urges that the objective of all measures dealing with incentives for the financial sector should be to discourage market players from taking too much risk. The EESC notes, that the framing of the NPL issue in the Commission's Action plan is going in the opposite direction.
Reason
First, cross-border NPL sale has nothing to do with spreading the risk; we underline that once a loan is classified as NPL this means that the credit risk, which is the most important risk undertaken by a bank, has occurred; Thus, NPL sale is not risk spreading as risk already occurred, but it is exactly the opposite. Second, the BRRD, CRR and all other regulations are about limiting concentration of risk, thus selling various portfolios of NPLs is not risk spreading but limiting the risk concentration in a bank, and thus decreasing the pressure on the bank’s activity; if EESC wishes to propose other measures to limit risk accumulation, we underline that EESC should be more articulate than the statement above in the context of the abovementioned regulations. Third, the current crisis is very different from the 2008-2009 financial market crisis, hence the lessons learned are not necessarily applicable in the new context. Fourth, in the current situation, the expected accumulation of NPLs has nothing to do with banks which had taken over too much risk, but with an unprecedented pandemic – hence the approach should be different and specific. Fifth, urging for excessively cautious lending post-pandemics (if our understanding of this indirect recommendation is correct) might be against the societies interest for economic growth.
Outcome of the vote
Votes against: 40
Votes in favour: 34
Abstentions: 7
Point 3.13
Amend as follows:
3.13
At the same time, the EESC highlights that European businesses, workers and civil society require resources and full support to withstand the crisis and thus such support measures should be put forward by the EU. it is not credit purchasers and credit servicers who should be supported, but rather it is European businesses, workers and civil society that require resources and full support to withstand the crisis. Such assistance should be available over a period of up to three years (as per the Next Generation EU stimulus package) to support businesses and borrowers that were deemed healthy and creditworthy prior to the pandemic. Virtually the entire population of Europe is affected by the rising socio-economic insecurity. Businesses experience disruption due to forced closures and reduced demand, while households are confronted with unemployment and a fall in income. The EESC believes that European citizens and businesses would need an entirely different kind of measures and obviously not the fast enforcement of the NPL framework as the Commission proposes.
Reason
The draft directive for credit purchasers and credit servicers envisages exactly the regulation of such activity not the support thereof. The fast recovery of NPLs is considered in order to enable faster economic rebound. The longer NPL lingers in the bank’s balance sheets, the more this has the ability to translate into longer legal processes and poorer experience by borrowers. Social insecurity during COVID-19 pandemic is indeed a reality yet it is unclear how keeping the NPLs in the bank balance sheets is supporting the healing of such social insecurity.
Outcome of the vote
Votes against: 47
Votes in favour: 33
Abstentions: 5
Point 4.1
Amend as follows:
4.1
The Commission is convinced that the agreement on the proposal for a directive on credit services and credit purchasers, in essence creating a common secondary market for NPLs, is a top priority. The EESC is concerned with plans 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. The EESC is also concerned that the proposal for a directive on credit servicers and purchasers would prevent states from enacting any other or further requirements for credit servicers and purchasers, even if such requirements were deemed to protect debtors. If "home" and "host" supervision is ensured, consumer protection rules are observed, "best practice" guidelines are provided via the EBA and a uniform approach to such activities is envisaged, most of the issues raised here would be addressed. However, the EESC notes that there are too many "ifs" to be observed, until real debtor protection is made a reality.
Reason
Will be given orally.
Outcome of the vote
Votes against: 43
Votes in favour: 38
Abstentions: 8
Point 4.4
Amend as follows:
4.4
Another pillar of the Action Plan is related to the proposal for AECE – accelerated extra-judicial collateral enforcement –, 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 acknowledges that households (private consumers) are excluded from this procedure and support the achievement of a proper balance between AECE toll and Directive (EU) 2019/1023 and insolvency procedures. However, in the EESC's view, AECE may prove a counterproductive measure if extra-judicial enforcement becomes a norm, a default option in the loan contract. It should be ensured that distressed businesses are not left helpless and do not lose access to the standard judicial system with its checks and balances, developed on the basis of age-long tradition. In the EESC's view, systematic collateral recovery delay issues should be dealt with on a country-by-country basis, by carrying out well-prepared reforms and with targeted interventions by Member States where bottlenecks persist.
Reason
Indeed, AECE is to be used only for businesses, not for households. Note, however, is to be made that until the draft directive is finalised and a compromised is reached, the conclusions above regarding the AECE becoming the norm and risks posed by same is groundless. This is because the AECE needs to be seen in conjunction with agreement between parties, insolvency rules and the Restructuring Directive (EU) 2019/1023.
Outcome of the vote
Votes against: 51
Votes in favour: 36
Abstentions: 5
Point 4.9
Delete the point:
4.9
Therefore, the EESC advocates that credit investors and debt collectors should not be given an EU-wide operating "passport" if they buy consumers' (private customers) NPLs. It has to be examined whether the SME sector debt should be exempted too.
Reason
In the absence of clear causality, this is purely argumentative.
Outcome of the vote
Votes against: 49
Votes in favour: 34
Abstentions: 8
Point 4.19.3
Amend as follows:
4.19.3
For banks able to provide evidence of a strong link to the real economy (a significant share of their assets relating to non-financial businesses and households), the EESC envisages that further flexibility could be granted. On the other hand, the utmost care must be taken in relation to globally systemic financial institutions that are prone to risk-taking and are highly interconnected with other financial market players.
Reason
Distinction between systemic institutions and others institutions is not clear in the context. Besides, global systemic institutions are the ones which are more closely and deeply supervised and in the way the statement is written, implies that globally systemic financial institutions are prone to risk taking, which obviously it is not the case.
Outcome of the vote
Votes against: 52
Votes in favour: 37
Abstentions: 3
Point 1.2
Amend as follows:
1.2
Tackling the root causes of NPLs is paramount. The EESC stresses that the most effective ways to avert the build-up of high volumes of NPLs by households and SMEs alike are: ensuring that we strive constantly to improve competitiveness, building solid social security systems, combating poverty, over-indebtedness and unemployment, guaranteeing adequate wages and implementing countercyclical economic policy measures in times of crises. Through these steps, we can achieve financial market stability and economic resilience, whilst tackling poverty and massive inequality at the same time. The EESC considers that the post-Covid NPLs are the result of an accidental disaster (pandemic) that has touched virtually all economic sectors and that the solution should focus on business continuity and economic recovery. This implies a thorough analysis of banks’ portfolios with granular and quality data, temporary targeted adjustments to provisioning backstops and NPLs sales.
Reason
The statement is general and has no obvious connection with the Action Plan which, in our view, is focused on addressing a narrower issue: existing loan stock and prevention from reaching high levels of NPLs in the aftermath of the pandemic. We can agree with general statements, yet we believe this exceeds the scope of an opinion on the Action plan and in this view we are proposing a rephrasing of the text in line with the scope of the Action Plan. It could be true that once poverty & social inequality are eliminated, adequate wages are ensured and social systems work flawlessly, the financial system would become stable as NPLs would be virtually hard to build up; yet these will always be subject to exogenous shocks (as e.g. the pandemic) while the state cannot rule all the aspects of an economy irrespective of which school of economics one would follow. Hence we propose to reconsider the generality of the statements.
Outcome of the vote
Votes against: 49
Votes in favour: 40
Abstentions: 5
Point 1.5
Amend as follows:
1.5
The EESC notes that the need for a pan-EU, and cross-border NPL market is exaggerated. Therefore, the Committee is concerned with plans to provide an and EU-wide operating "passport" to debt collectors need to be accompanied by increased " without proper supervision form from both their "home" and "host" countries to ensure among others, proper observance of consumers protection rules. 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. The EESC notes that there are too many "ifs" to be observed, until real debtor protection is made a reality.
Reason
In the draft Directive referring to credit purchasers and credit servicers, it is clearly mentioned that consumer protection rules need to be observed. Hence, EESC should point out the concerns so as to be properly addressed. Another note to be added here is that a secondary market of NPLs already exists and is already cross-border considering the categories of investors; hence EESC should also note the reverse: i.e., that the proposed directive for credit purchasers and credit servicers brings rules and regulations applicable to such forms of businesses and a more clear application of consumer protection rules. This is a net gain in our view and should not be discarded as an "if" via the above statement. The "ifs" would depend on the actual states implementing the rules not that the rules are now in the making at EU level.
Outcome of the vote
Votes against: 44
Votes in favour: 36
Abstentions: 9