The European non-performing loan market and its policy drivers

Before 2009-2010, to speak about a non-performing loan1 (NPL) market most European jurisdictions was a clear overstatement. In countries such as Spain, the notion of an NPL sale was still unheard of merely 12 to 15 years ago.

Common wisdom dictated that, regarding their core product (loans) - and unlike their US counterparts, which "originated to sell" - European banks "originated to hold". Loans were handled in-house throughout their entire lifecycle; they were originated (not purchased), serviced, collected on and, where necessary, restructured or enforced with the subsequent management of any repossessed collateral until disposal, all by different departments of the institution, using internal resources. Commensurately, it would also be an exaggeration to say that there was a "servicing industry", as banks very seldom used external support for the servicing of their portfolios of impaired assets.

This made sense in a system where the loan, in addition to being an investment, was often seen as the driver of a commercial relationship. In this regard, to sell the loan would be considered almost tantamount to selling a client - something that banks approached with understandable reluctance.