Non-performing loans: Council agrees on out of court mechanism

ABBL Published 29.11.2019

On 27 November 2019, while the European Parliament was voting on the new Commission, the EU ambassadors adopted the position of the Council of the EU on a proposal for a common framework and minimum requirements for out-of-court mechanism. Such mechanism will help banks to recover the value from loans guaranteed with collateral in case the borrower is not able to pay it back. Indeed, an out-of-court enforcement would likely prevent the accumulation of non-performing loans (NPLs) since it provides banks with legal instruments to recover collateral more quickly, without having to go to court.

The Minister of Finance of Finland – which holds the Council Presidency until the end of December –, Mika Lintilä, stressed the progress made by European banks in reducing the stock of NPLs in their balance sheets since the financial crisis. The result is linked to the improvement of the economy and to the numerous measures undertaken by the EU to eradicate NPLs from banks’ balance sheets. Nevertheless, while in Luxembourg not an issue in some other Member States the ratio of NPLs is still high, like Greece, Cyprus, Portugal and Bulgaria, and the risks for banks to accumulate NPLs in the future has to be counterbalanced. For this reason, the EU strove to introduce legal tools that would give banks the capacity to recover the value of failing loans in a quick but safe way.

The proposed directive is part of the rules on business restructuring and second chance previously adopted by the Council on 6 June 2019. The original proposal of the European Commission also included a part on the development of secondary markets for NPLs, on which the Council reached a position on 27 March 2019. Indeed, that part was designed to encourage secondary markets for NPLs and was more forward-looking in terms of preventing the accumulation of NPLs. The proposed out-of-court mechanism on which the Council now reached an agreement is more focused on the protection of credit institutions’ and borrowers’ interests. It establishes that, when the loan would be granted, the parties have to agree on the enforcement mechanism, so if the borrower defaults on the loan, the collateral would be valued and either sold or appropriated. The procedure will go on until the outstanding sum would then be turned over to the creditor.

With the approval of this negotiating stance, the Council of the EU stands ready to start talks with the European Parliament as soon as the latter is to reach a negotiating position of its own.

By Silvia De Iacovo, ABBL & ALFI European Affairs

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