The €1 trillion challenge in European banking: How to wind down nonperforming and noncore assets

Published: November 8, 2017

Executive summary

The European banking industry today faces multiple challenges, including recessions in various countries, increased regulatory activity, and a sustained low-interest-rate environment. The levels of nonperforming loans (NPLs) and noncore assets in the continent’s banking sector remain stubbornly high, a legacy of the 2007–08 financial crisis, and one that remains a vital concern for the financial sector and the overall economy. Banks must wind down these weak assets to improve their chances for future growth. Many are doing this by shifting the troubled assets into separate entities set up strictly for the purpose of selling off the NPLs and noncore holdings.

To assist Europe’s banking executives in this effort, we conducted a study of wind-down operations across the continent and identified factors that make them effective in reducing the burden of NPLs and noncore assets. Our study encompassed 18 of the region’s largest wind-down units, which were selected for their broad coverage of the diverse European market, strong data, and significance within their respective markets.

We found that effective wind-down entities share a number of key traits. In addition to adopting a more appropriate organizational structure, they follow four operational imperatives:

  1. A fresh start supported by a tailored operating model, accurate asset valuations, and a comprehensive wind-down plan
  2. Loaded batteries in the form of appropriate levels of funding and liquidity throughout the wind-down life cycle
  3. Proficient execution supported by the staffing, policies, processes, and governance structures necessary to achieve performance goals
  4. A coherent ramp-down plan that enables a measured, incremental reduction in operations executed in lockstep with the wind-down of assets

Banks that wind down their nonperforming and noncore assets in this manner not only improve their financial health, but also muster the resources needed to navigate existing market disruptions and build a strong foundation for growth.

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Conclusion

Europe’s banking industry remains beset with nonperforming and noncore assets. These assets must be wound down so that banks can ensure their financial health and muster the resources needed to respond to current and future market disruptions. But it’s critical that banks choose the most suitable wind-down structure, taking into consideration the increasingly complex and harmonized regulatory frameworks, and develop the ability to effectively and efficiently launch and manage wind-down entities. Banks that do this work well will be able to build a strong foundation for future strategic growth.

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The €1 trillion challenge in European banking: How to wind down nonperforming and noncore assets