Faced with the risk of an explosion in the number of non-performing loans, or bad debts, the European Commission has drawn up an action plan. It includes the creation of bad banks to enable banks to remove bad debts from their balance sheets.
The growing risk of bad debts
With the health crisis, the risk of a build-up of bad debts is becoming clearer by the week.
While credit defaults have not soared for the time being, there is little doubt in the minds of European authorities that the storm is yet to come. Indeed, as soon as the various public support schemes for the economy come to an end, and loans under moratorium expire, the situation is likely to turn upside down.
At present, while level 3 doubtful debts have fallen by 10% in one year, this is not the case for level 2 debts, which are likely to turn into bad debts. These have risen by 23% in the space of a year, reaching a total of 1,200 billion euros. Loans under moratorium amount to 870 billion euros.
What's more, the banks have not yet succeeded in completely purging their balance sheets of bad debts from the 2008 crisis, which still amount to 528 billion euros.
A system of national bad banks
To prevent banks, weighed down by these bad debts, from reducing access to credit, with a consequent drag on economic recovery, the European Commission has drawn up an action plan unveiled on Wednesday December 16, 2020.
Among the measures envisaged is the creation of national bad banks: these hive-off vehicles, known as AMCs in the financial sector, are designed to buy up banks' bad debts, enabling them to remove them from their balance sheets.
However, the creation of these hive-off structures would be left to the discretion of individual countries, and the creation of a European bad bank has been ruled out as too complex and costly to set up.
The Bureau Européen des Unions de Consommateurs (BEUC), meanwhile, has expressed concern that borrowers in difficulty are falling into the hands of collection companies, which buy bad debts from banks in the expectation of higher repayments. Long criticized for its aggressive practices, the sector claims to have restructured and professionalized itself to be able to offer individualized support solutions.