Image from La Dépèche, by José Navarro, published on 23/06/2010

EU Commission initiative on credit servicers, credit purchasers and the recovery of collateral 2018/0063 COD

Bringing the share of non-performing loans (NPL) down to below 5% of total bank assets is a key legacy task of the 2007/8 financial crisis.
In several EU countries, the Canadian Rating Agency (DBRS) estimates that, at current rates of reduction, more than two years will still be needed to achieve that goal – three years in Ireland (3 banks) and Belgium (1 bank); four to five years in Italy (11 banks) and Portugal (5 banks); seven years in Cyprus (3 banks) and up to ten years in Greece (4 banks).

So the European Central Bank and the European Commission have recently tabled proposals to accelerate risk reduction across the EMU and encourage a greater sharing across financial markets of that risk. But what they propose, steeped in the logic of the financial lobby, is not only socially unjust, it is in all likelihood, going to be ineffectual in the countries where the problem is greatest, precisely for that reason.

It is socially unjust because, central to their solution, is squeezing indebted households and companies, a great many of whom are in difficulty through no fault of their own. Their present difficulties have their origin in austerity policies imposed as a result of financial irresponsibility of both banks and governments during the previous decade.
The squeeze is done without safeguards, by promoting the development of an industry of specialists in the recovery of unpaid debts. Their business model is not charitable. Having bought NPL for say 25c per euro of debt, their motivation of course is to recover more, much more if possible. Worse, their business model can be based on a perenity of debt, in other words on charging continuously fees and penalties on top of already burdensome interest charges. Could it be that the longer the debt is unpaid, the better the expected return ?
Beyond that, the solution proposed is likely to be ineffectual especially in those countries where the problem of NPL is greatest. Those are also countries where political stability is weakest. The backlash from a socially insensitive policy in a country where a large number of households and small companies are struggling with their debt, can be dangerous. Take for example the situation in Greece, even if that might be considered untypical, the point has already been reached where Court business is regularly disrupted, and masked intruders even smash up the offices of lawyers.
In those countries especially, the Commission’s proposals are actions worthy of a pyromaniac.
So what to do ? The problem of NPL is real. A solution is needed especially for those countries and banks most in difficulty. EU institutions cannot escape their own responsibility for finding a fairer and more realistic way forward, given that these are also counties where, by and large, governance is also weakest, and national solutions are likely to be slow to put in place, if at all.
And let’s take this opportunity though to look to more sustainable solutions for every Member State. Our modern consumer society is fuelled by ever-increasing debt. That contributes to regular crises of over-indebtedness that spill over into financial crises, when it becomes suddenly apparent to all the evident fact that much of this debt is unrecoverable. The answer is not to go on pretending that it should and must always be recoverable, but rather to establish ways of better avoiding, but also effectively resolving over-indebtedness when it occurs nevertheless.
Rather than relying on private debt recovery companies, a better approach would be to set up an independent arbitration service mandated to propose – and even impose – solutions that fairly balance the interests of lender and borrower, and above all, aim to resolve over-indebtedness quickly, fully and definitively.
The cost of setting up and running such a service could be funded by a levy on banks and other lending institutions, including credit card companies. It would have coverage over a whole national territory, and could be linked to existing bodies, such as the consumer ombudsman.
How would such a service work ? The EU institutions would do well to redirect their expertise towards developing such a proposal. Not least because it would help push back against an image of remote, technocratic Institutions, unaware or even indifferent to the less fortunate in our societies. Those responsible for financial policies should reach out pro-actively to colleagues dealing with consumer affairs or social policies, marginalized in previous policy discussions, and dialogue better with a more inclusive set of stakeholders.
Clearly, there would need to be mutual loyalty, transparency and fair dealing between lenders and borrowers in difficulty. Different situations – temporary or permanent, foreseeable or unforeseeable for example – require different kinds of solutions. The arbitration service should offer immediate relief, and a quick decision on a more permanent solution. Where the two parties, despite arbitration, fail to reach agreement, it may be necessary to impose in law a solution on the two parties.

Robert Shotton & Olivier Jérusalmy