The NPLs Services Directive. The Restructuring Toolkit for Asset Quality

Abstract

The debate about the implications of nonperforming loans (NPLs) in the financial sector has intensified following the proliferation of legislative measures designed to contain the surge of impaired assets on banks’ balance sheets. The European legislation adopted an overall strategy to tackle undesirable stocks of NPLs through the development of secondary markets and out-of-court resolving mechanisms which should expedite the transfer of bank loans to third parties while, at the same time, removing undue obstacles to credit servicing. This chapter examines the EU regulatory framework of service providers and credit servicers along with the NPL restructuring tools which represent major reforms to enhance debt collection procedures. It observes that banks should employ private workouts and extrajudicial processes to facilitate the internalisation of losses in the management of non-performing exposures. Outsourcing debt collection services may create negative externalities, impeding bail-in arrangements and the internal treatment of deteriorated loans. Further, reliance on public recapitalisation measures and government financial support to aid failing banks may incentivise a dangerous return to bail-out packages.