Non-performing loans: in order to increase the effectiveness of bank securities in the event of outstanding debts

The European Commission is considering creating a new tool, the “Accelerated Loan Security”

The European Central Bank defines non-performing loans (NPLs) as loans with more than 90 days’ arrears or which are unlikely to be recovered without triggering the security.

NPLs have a strong impact on the balance sheets of European banks: € 843 billion in the second quarter of 2017, or 6% of GDP in the EU area.

The proportion of NPLs, which represented 1.8% of loans granted in the EU 10 years ago, rose to 5.5% in the second quarter of 2016 albeit a wide disparity among Member States.

NPLs curb the profitability of banks, threaten their viability and immobilize capital at the expense of financing the economy.

Between 10 July and 20 October 2017, the European Commission held a public consultation on the measures under consideration for reducing this stock of NPLs.

In the context of this consultation, the Deloitte Legal network, of which the Deloitte Société d’Avocats law firm is a member for France, responded to the consultation concerning 15 Member States.

The first part of the consultation covers aspects relating to the secondary markets for NPLs, i.e. the market on which loans are sold, and those for the projected creation of dedicated loan servicing companies to take over these NPLs.

The second part of this consultation deals with the protection of creditors that have real property securities (banks) against default of payments by debtors and the creation in the EU of a new tool, the “Accelerated Loan Security” (ALS), the principal features of which are the following:

  • Effects : an out-of-court contractual mechanism enabling the lending creditor to execute its security swiftly and simply by acquiring the ownership of the encumbered asset with the possibility of reselling it afterwards; this is an alternative to the judicial enforcement procedure which is often considered to be too lengthy, too costly, inefficient and which contributes to the accumulation of NPLs.
  • Preferred creditors concerned: lending banks holding a real property security (pledge or mortgage)
  • Debtors concerned: companies and individual entrepreneurs
  • Debtors excluded: consumers
  • Loans concerned:  : those secured by a real property security
  • Assets concerned: tangible movable (scope to be defined) or immovable (excluding principal place of residence) assets, assessed by an independent expert
  • Triggering event: debtor default prior to the opening of an insolvency procedure
  • Difference between the value of the collateral and the amount of the debt:
    • If positive, the bank would reimburse the borrower.
    • If negative, the borrower would be fully discharged from further repayment obligation, which represents a significant advantage for the debtor and therefore makes the ALS more attractive and without precedent under current French law.
  • If insolvency proceedings are initiated against the borrower: the effects of the ALS would be suspended but the Judge may authorize the bank to sell the asset itself, with the obligation to pay back the proceeds of the sale to the liquidator.
  • Principal advantages:the ALS would be a simple, swift, contractual, extra-judicial and inexpensive tool enabling banks to recover the value of their collateral more rapidly.
  • Objectives:
    • Contain the accumulation of NPLs in the balance sheets of banks
    • Provide banks and debtors with an EU-wide collateral enforcement tool (objective of harmonization)
    • Improve the predictability and timeliness of foreclosure procedures, which are essential elements in the NPL processing strategy
    • Promote the financing and thus the development of micro, small and medium-sized enterprises
    • Increase the attractiveness of the EU and Member States for investors from all over the world

Despite some differences, the ALS is reminiscent of the French mechanisms of the “clause de voie parée” and the “pacte commissoire”, incorporated into French security law with the 2006 reform.

Stéphanie Chatelon

Stéphanie Chatelon, Partner, heads the Business Law department. She advises her clients on restructuring and insolvency matters. Stéphanie assists French and foreign companies in connection with restructuring transactions, disposals and […]