Central banker Yannis Stournaras last week formally launched the debate on the creation of a so-called “bad bank” – a corporation to which all banks’ nonperforming loans would be transferred – as he addressed the annual general meeting of the Bank of Greece.
Back on the table after a long time, this prospect represents a substantial measure for tackling bad loans. It is bolstered by the European Union discussion on measures for banking integration and the definition by the European Commission on March 13 of the guidelines for the creation of asset management companies (AMCs).
These AMCs will be mostly state-owned and will take over the management of NPLs from banks, relieving the latter’s financial reports of problematic portfolios.
The discussion on the creation of AMCs is taking place in the context of the high level of bad loans in Greece, Italy and Cyprus, with the Cypriots having already proceeded with the creation of such a company. This venture is considered crucial for Greece, which after almost a decade of financial crisis is yet to clear out its credit system so that it can start financing the economy again.
Competent sources say that procedures in Cyprus are at an advanced stage and the plan to this effect carries the name “Estia.” According to the same sources, that entity will undertake the housing NPLs connected to main residences which are currently in the portfolios of Cypriot banks. Its aim is to revive those problematic portfolios by proposing to borrowers sustainable solutions so they can pay off their loans with the aid of state contributions that will finance up to a third of the monthly tranche stemming from the renegotiation of each loan.
The main advantages of the AMCs are the uniform tackling of the NPL problem across all banks and the fact that their operation does not violate EU legislation on state subsidies; for this to happen, the properties on which the loans are secured will need to be transferred to the AMCs at their fair value, a condition to be spelt out clearly in the directives that the European Commission will issue. A key issue is the funding of AMCs, which in Greece’s case remains open.