According to the ECB, there are 921 billion euros worth of scrap loans in the eurozone, which accounts for 6% of all loans. In the total EU it is even 1.3 trillion euros. This refers to loans that have de facto defaulted, ie where, for example, the debtor no longer pays interest or can not pay the total at the end of the term (non-performing loans / NPLs). Above all, countries like Italy groan that the local banks are virtually unable to leave the scene and can not provide the economy with fresh loans because they are paralyzed by their legacy assets (NPLs).
So what to do? Recently, for example, in Italy, the Banca Monte dei Paschi had been supported with huge amounts of money. But you can not do that for all the junk banks. So the NPL must be sold to the best possible residual value to risk-taking investors. It is always about: A loan of exemplary 100 euros official total volume, how much is still worth it? How much can the creditor still squeeze out of the debtor? Here, a potential buyer (hedge funds etc) has to think carefully about how valuable credit packages with scrap are.
What do you pay the selling bank for a package? Instead of officially 100 euros loan volume maybe 10, 20 or 30 euros residual value? In order for banks to finally gain momentum on the subject, and to maximize sales proceeds, the ECB is now proposing that an electronic marketplace has to be created for risk-taking investors and willing-to-sell banks. Then, almost the fates of debt customers would be fully electronic as on eBay shifted across the planet.
Somehow sounds like the repetition of the telephone trade with real estate loan packages in the US until 2007 – only now in a more modern version via an online marketplace! The difference in this case, however, would be that all parties already know that they trade scrap at this marketplace. So far, the problem seems to be for individual banks that want to get rid of their scrap: There are only a small number of investors who dominate the market and thus the percentage of the sales value of the packages. And potential buyers who are not yet active in the market, have no transparent way to compare the terms of such packages across Europe.
Indeed, creating such a marketplace could increase transparency, and increase the number of potential buyers. Until now, buyers and sellers have to meet individually or exchange information individually by telephone. The potential buyer today has to look somewhere in Europe if he finds a major bank which wants to sell. A stalking that may deter many willing buyers to buy so far!
According to the ECB, these problems could be eliminated – because so far it is true that there are large price differences between the purchase prices investors want to pay and the selling prices that banks want. That would be roughly comparable to a stock market without a central stock exchange. All buyers and sellers would have to come together by their own initiative, and would not know if there are not better prices prevail elsewhere. Therefore, it may well be possible for banks with such a platform to achieve better sales revenues and get their scrap out of the books faster!
Well, who could create such a platform, if not the ECB?
In the following chart you can see for each Eurozone Country the volume of the NPLs, which the banks still want to have for their scrap in yellow. Below in blue you can see the possible purchase offers of the investors. The differences are considerable. Trading platforms could bring buyers and sellers closer together, giving banks the chance to get rid of their scrap faster and better.