RESEARCH

How auction methods can boost non-performing loan sales

By Tim Benschop

Senior Transaction Manager

Published Tuesday 5 January, 2021

In this article we describe how different auction formats are relevant for different types of NPL and how the NPL Markets platform provides the flexibility to use the different formats.

The Nobel Prize for economics has this year been awarded to two scientists that have made significant contributions to the knowledge and development of auctions. Every day, auctions are held around the world in numerous disciplines from second hand items on eBay to expensive art at Sotheby’s. Auctions are also used to sell non-performing loans (NPL) from banks to investors. Due to Covid-19 the market for non-performing loans is currently experiencing lower transaction volumes and bid-offer spreads are larger than usual indicating market failure. Well-designed auctions can help boost the NPL market, a topic of increasing importance due to the expected wave of new NPL after the pandemic.

The relevance of auctions for the market of NPLs

In 2017 the Council of the European Union agreed an action plan to address the problem of non-performing loans in the banking sector. The Council believes that a European-wide plan can help lower the stock of NPL on bank balance sheets. The action plan consists of several measures including strengthening the secondary NPL market. On December 16th, the European Commission published a new action plan including the creation of a data hub to increase transparency with post-trade transaction details to overcome uncertainty and help the market to become more efficient (NPL Markets 2020b). In the market for NPL, the term auction typically refers to a clock auction like an English auction whereas the common sales methods by means of first price sealed bid is often referred to as a tender. Gaffeo and Mazzocchi (2017) analyzed the market for NPL in several European countries and observed that it is failing due to low transaction volumes and large bid-ask spreads. They see three inefficiencies: 1) informational asymmetries, 2) barriers to entry, and 3) collusive behaviors. A well-functioning digital marketplace with auction features can address the barriers to entry and the collusive behavior. The data hub idea proposed by the European Commission could help overcome informational asymmetries.

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How auction methods can boost non-performing loan sales