EU Commission: Guidance on Non-Performing Loans

Banks lend money. The loans they make perform well, in general. Sometimes they don’t and banks’ balance-sheets become over-burdened by non-performing loans. This phenomenon causes huge imbalances in the operation and performance of the affected bank itself and sometimes threatens the very existence of such bank. And when banks fail there is a threat to society at large. State Aid is one form of state intervention to redress the situation.

EU recognizes the propriety of Member States’ intervention to redress such imbalances through measures which may or may not resort to State Aid. In consequence, the EU Commission has developed a blueprint that provides practical, non-binding guidance to Member States for the design and set-up of measure of dealing with impaired assets.

The blueprint clarifies the permissible design of asset management companies receiving public support under the EU legal framework, in particular the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) and EU State aid rules. The choice of the type of intervention lies with the particular Member State.

The Commission has to ensure that any such measure is in line with EU rules. If a Member State chooses to intervene, it must do so under conditions similar to those under which a private investor would do and must be remunerated for the risk assumed in a way similar to that in which a private investor would accept. If these conditions are fulfilled, then such an intervention would not constitute State aid and falls outside of EU State aid control.

Under these rules, in February 2016, the Commission approved an Italian guarantee scheme which aimed to acilitate the securitisation of non-performing loans (Fondo di Garanzia sulla Cartolarizzazione delle Sofferenze – GACS). The scheme was last prolonged on 27 May 2019. Up to mid-February 2019, the GACS scheme has removed approximately €63 billion of non-performing loans from the Italian banking system.

Last week, on 10 October 2019, the Commission also announced the approval of a market conform asset protection scheme for banks in Greece. It has found Greek plans aimed at supporting the reduction of non-performing loans of Greek banks to be free of any State aid.

The Commission found that, under the asset protection scheme (known by the name of “Hercules”), the Greek State will be remunerated in line with market conditions for the risk it will assume by granting a guarantee on securitised non-performing loans. “Hercules” is designed to assist banks in securitising and moving non-performing loans off their balance sheets. Under the scheme, an individually managed, private securitisation vehicle will buy nonperforming loans from the bank and sell notes to investors. The State will provide a public guarantee for the senior, less risky notes of the securitisation vehicle. In exchange, the State will receive a remuneration at market terms. The objective is to attract a wide range of investors and to support the banks in their efforts to reduce the amount of non-performing loans on their balance sheets.

The Commission’s assessment that the State guarantees will be remunerated at market terms according to the risk taken was based on the following findings:

  • The risk for the State will be limited since the State guarantee only applies to the senior tranche of the notes sold by the securitisation vehicle.
  • The State guarantee on the senior tranche will become effective only if the condition that more than half of the non-guaranteed and risk-bearing riskier tranches have been successfully sold to private market participants is fulfilled.
  • The State’s remuneration for the risk taken will be market conform since the guarantee fee will be based on a market benchmark and correspond to the level and duration of the risk the State takes in granting the guarantee.

Thus, in this case also, the Commission could conclude that the measure is free of State Aid within the meaning of EU State aid rules.

[Source: Competition Newsroom]