ECB Proposes Blueprint for Bad-Loan Trading Platform

By Tom Fairless Features Dow Jones Newswires

The European Central Bank has sketched out a possible blueprint for a trading platform that could help eurozone banks to dispose of a mountain of sour loans.

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In a report published Monday, the ECB advocated a centralized trading platform for non-performing loans, which it said could help reduce costs for potential investors, and thereby increase loan prices.

It is the latest in a series of moves by the ECB, the eurozone's top banking supervisor, to prod lenders into shedding loans that it worries are clogging up their balance sheets and curbing economic growth.

The platform could be set up by the banks that intend to use it to sell non-performing loans, or NPLs, or by a third-party data provider, the ECB said. It should collect, validate and harmonize data on NPLs, and offer investors the ability to execute transactions, it said.

Such a move could help address failures in the eurozone market for bad loans, which is currently inefficient, with a limited number of large buyers and low transaction volumes and prices, the ECB said. That is because it is expensive for investors to research the details and history of each individual loan.

Governments shouldn't finance the platform, but they could incentivize banks to use it, and introduce new regulations to facilitate its creation, the ECB said.

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"The costs of operating the platform should be borne by the industry," the ECB said, adding that establishing the platform may require "a substantial upfront fixed investment."

Eurozone banks held around 921 billion euros ($1.100 trillion) of non-performing loans at the end of March, comprising 6.1% of total loans, according to the ECB.

"By bringing transparency to the marketplace and reducing transaction costs, barriers to entry can be lowered, and a wider and more diverse investor base can be brought to the market, increasing price competition and resulting in a deeper and more liquid market," the ECB said.

Still, it said that further analysis is needed to assess how feasible the concept is in light of data protection and bank-secrecy rules.

The ECB has clashed with southern European officials over its efforts to crack down on bad loans. Italian officials warned last month that ECB proposals to increase provisions against non-performing loans could reduce credit to smaller firms.

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

November 27, 2017 06:16 ET (11:16 GMT)