Non-Performing Loans and Securitisation in Europe

Considerable attention has centered in the recent past on the issue of non-performing loans (NPLs) in the European banking system. The focus has been less on securitisation as a viable alternative resolution model and more on alternative structures. Against the broader background of new regulatory developments in the Italian NPL market, that came into force earlier this year, this alert examines the basic structure of an NPL securitisation and its pressure points.

The amount of NPLs held on European bank balance sheets exceeds Euro 1.2 trillion: a significant portion of the unwanted, non-core and non-strategic assets held by European banks according to some estimates. The resolution of this situation has, so far, been addressed using one of two models. The first is the disposal of NPLs to state-sponsored bad banks, such as Sareb in Spain or NAMA in Ireland. The second is the disposal of NPLs to private investors. Both these solutions involve the banks selling the