BoG: Bad-loan plan is ‘essential’

It targets the reduction of the credit sector’s nonperforming exposures to below 10 pct in 3 years’ time

The creation of a special purpose vehicle (SPV) to undertake nonperforming exposures in bank portfolios is necessary as it will allow lenders to improve their financial reports and manage their assets efficiently, the Bank of Greece argued yesterday while announcing the details of its proposed plan to that end.

The central bank added in its Credit System Stability Report that even if the commitments banks have made regarding the reduction of their bad loans are entirely fulfilled, the NPE rate will still remain high, depriving the economy and productive investments of much-needed resources.

The BoG proposal for the transfer of bad loans to an SPV, which will also receive part of the lenders’ deferred tax assets, is aimed at reducing the NPE rate below the 10 percent level within the next three years, combined with banks’ ongoing efforts – through auctions, debt restructurings and loan sales – to meet their pledges to the Single Supervisory Mechanism (SSM).

The plan provides for the simultaneous transfer to the SPV of banks’ deferred tax assets worth 7.5 billion euros – which currently count toward the lenders’ share capital – and bad loans adding up to 40 billion euros. The SPV will use the deferred tax assets to issue bonds in order to acquire the bad loans from the four systemic banks and resell them at market rates. Valuations of the loans to be transferred to the SPV will be made by independent entities and the SPV will be managed by loan and credit management companies.

This project is expected to considerably reduce the risk of banks being acquired by the state if they are forced to take losses from the write-offs they make, the haircuts they grant and the bad loans they sell. Crucially, this plan will fit in with the other NPE-reduction solutions banks are utilizing, the Bank of Greece report highlighted, while it neither commits nor forces other authorities and entities involved in the matter into its adoption.