Utilizing AMCs to tackle Eurozone’s legacy non-performing loans

Aimilios Avgouleas, Charles Goodhart

Research output: Contribution to journalArticlepeer-review

Abstract

The recovery of the Eurozone (EZ) economy has made even more pressing the tackling of its debt overhang with the bulk of over 1 trillion Non-Performing Loans (NPLs) concentrated in the more vulnerable economies of the EZ periphery. There is clearly a need to adopt a more radical approach to resolving NPLs than merely augmenting supervisory tools and national legal frameworks. The discussion about the feasibility of country-based or Pan-European Asset Management Companies (AMCs) to tackle legacy NPLs has recently intensified. Yet political objections premised on fears of debt mutualisation, the structural and legal questions surrounding the possible establishment of AMCs, and differing recovery rates and levels of market transparency within the EZ have led to the dismissal of the idea by the European Council. This article discusses the merits and shortcomings of AMCs in tackling NPLs and proposes a comprehensive structure for a Pan-European “bad bank” with virtually ring-fenced country subsidiaries to ensure burden sharing without debt mutualisation. The proposed “bad bank” structure intends to resolve a host of governance, valuation, and transparency problems that would otherwise surround a “bad bank” solution. Also, the proposed scheme is in effecoctive compliance with the EU state aid regime and could lead, if implemented, to the alleviation of the EZ debt overhang to stimulate credit growth.
Original languageEnglish
Pages (from-to)97-112
Number of pages16
JournalEuropean Economy - Banks Regulation and the Real Sector
Volume2017
Issue number1
Publication statusPublished - 5 Jul 2017

Keywords

  • financial stability
  • Eurozone banks
  • Eurozone crisis
  • asset management companies
  • bank bail-ins
  • bank distress
  • non-performing loans
  • NPLs
  • bailout
  • bail in
  • BRRD
  • ESM
  • European and Banking Union
  • Eurozone crisis
  • fiscal backstop

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