## _sdn1519tbn

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---

### I. THE EU DEFINITION OF NPLS
- IMF FSI Compilation Guide (IMF, 2006) reporting recommendation:
  - (i) payments of principal and interest are past due by three months (90 days) or more, or
  - (ii) interest payments equal to three months (90 days) interest or more have been capitalized, refinanced, or rolled over (payment delayed by agreement).
- NPLs include loans with payments less than 90 days past due if national supervisory guidance recognizes them as non-performing.
- Supervisory guidance often references significant financial difficulty, bankruptcy, breach of contract, and treatment of restructured loans (Basle Committee Core Principle 18; Basel II).
- Heterogeneity across European national supervisory authorities:
  - 90 days past-due and bankruptcy commonly used as objective criteria.
  - Discretionary criteria vary: restructured loans may not be classified as NPLs or may be immediately upgraded; some authorities allow past-due loans to be classified as performing if high-value collateral, guarantees, or other risk mitigants exist.
  - “Debtor or customer view” approach used more in CESEE countries: all loans to a debtor downgraded if any of the debtor’s loans is classified as an NPL.
- Empirical classification responses (percent answering “yes”), Table I.1:
  - Existence of collateral, guarantees or other credit risk mitigants: 83 (26 European countries (WB study)); 55 (20 European countries with high NPLs)
  - Restructuring: 83; 60
  - Customer view (debtor approach): 74; 55
- January 2015 EU harmonization (Commission Implementing Regulation (EU) No. 680/2014 implementing technical standards submitted by EBA):
  - Non-performing exposures for supervisory reporting defined as:
    - (i) material exposures more than 90 days past-due and/or
    - (ii) unlikely to be repaid in full without realization of collateral.
  - Exposures in default or impaired must be reported as non-performing; collateral is not taken into account in the categorization.
  - Debtor approach applies to non-retail exposures when past-due payments exceed 20 percent of the gross on-balance sheet exposures.
  - Forbearance applied to non-performing exposures: exposures remain classified as NPLs until no impairment or default, one year has passed, and there are no past-due amounts or concerns about full repayment according to post-forbearance conditions.
- Implication: EU harmonization may increase NPLs where restructured loans were previously not stringently reported or where debtor approach was not required.

### II. CREDIT GROWTH DETERMINANTS IN CESEE
- Dataset and method:
  - About 450 banks, period 2000-2014, average 6 years of observations per bank.
  - Dynamic panel estimation (system GMM / Arellano-Bond tests reported).
  - Instruments include lags of independent variables, first period lag of NPL, pre-tax income ratio, capital/asset ratio, GDP growth (t-1), time and country dummies.
  - Data sources: Bankscope, IMF International Financial Statistics.
- Main regression findings (Table II.1):
  - Positive and significant predictors of real credit growth:
    - Growth in gross loans (t-1): 0.192***; 0.225***; 0.131*; 0.185; 0.206**
    - GDP growth: 1.114***; 1.350***; 1.153***; 0.850***; 1.073***
  - Negative and significant predictors:
    - NPL ratio (t-1): -0.464***; -0.531***; -0.389***; -0.352; -0.355***
  - Capital asset ratio (% of beginning period assets) positive/significant in some specs: 0.331***; 0.382***
  - Pre-tax operating income / Avg. assets % positive/significant in several specs: 1.522***; 1.028*; 1.575***
- Regression diagnostics and sample:
  - Observations: 1,052; 1,052; 1,000; 793; 793
  - Number of idBS: 257; 257; 278; 223; 223
  - Arellano-Bond AR(1) p-values: 0.000675; 0.000338; 0.000291; 0.00287; 0.000922
  - Arellano-Bond AR(2) p-values: 0.673; 0.637; 0.730; 0.714; 0.693
- Interpretation:
  - Higher NPL ratio, low capital-asset ratio, and low pre-tax earnings (percent of assets) associated with lower credit growth.
  - High GDP growth associated with stronger credit growth.

### III. MACRO-FINANCIAL EFFECTS OF HIGH NPLS
- Literature synthesis and channels:
  - Bank defaults are cyclical: fall in expansions, rise in downturns.
  - Negative relation between changes in the output gap and loan write-offs.
  - Banks’ asset quality influenced by nominal short-term interest rate, industrial production, stock market performance, business confidence.
  - “Gambling for resurrection”: low-capital banks may increase portfolio riskiness, causing further impairments.
- Feedback from NPLs to economy:
  - High NPLs raise cost of capital, increase lending rates, reduce lending volumes, and increase risk aversion.
  - Quantitative estimates: impact of 1 percentage point increase in NPL ratio on net lending around 0.8 percentage points reduction.
- Literature impacts on credit growth (selected estimates):
  - Dovern and others (2010): ≈ -0.4 pcp after two years
  - Espinoza and Prasad (2010): -0.4 pcp after one year / -0.7 pcp after two years
  - Nkusu (2011): -0.3 pcp after one year / -0.2 pcp after two years
  - De Bock and Demyanets (2012): -0.5 pcp after one year / -1.7 pcp after two years
  - Klein (2013): -0.8 pcp after one year / -0.6 pcp after two years
  - Bending and others (2014): n.a. after one year / -0.8 pcp after two years
- Distributional effects:
  - Reduced lending capacity disproportionately affects firms dependent on bank finance: smaller firms, firms with fewer tangible assets, and firms producing less tradable goods.
  - Empirical examples: post-bubble Japan and SMEs in Europe.
- Debt overhang channel:
  - Persistent NPLs linked to private sector debt overhang, depressing credit demand (Goretti and Souto (2013) evidence for 2000-2011 euro area periphery).
- Overall synthesis:
  - Empirical studies find significant negative relations between NPLs and both lending and GDP growth; median/mean impacts cluster around the ranges reported above.

### IV. THE IMPACT OF CORPORATE LEVERAGE ON INVESTMENT AND EMPLOYMENT
- Objective and data:
  - Estimate how firm-level leverage affects elasticity of employment and net investment to sales shocks, allowing asymmetric effects for positive/negative shocks.
  - Firm-level annual data 2005-2013 from ORBIS for countries with peak NPL ratios above 10 percent: Cyprus, Spain, Greece, Ireland, Italy, Portugal, Iceland, Croatia, Bulgaria, Hungary, Latvia, Lithuania, Serbia, Slovenia.
  - Structural variables lagged by two years; estimated with fixed effects.
- Key quantitative findings (Table IV.1 and IV.2 summaries):
  - Response to a 10 percent positive sales shock:
    - Employment elasticity:
      - Low leverage (0-10 percent): 1.5-1.6
      - Medium leverage (30 percent): 1.4-1.5
      - High leverage (150 percent): 1.1-1.1
    - Investment growth response:
      - Low leverage (0-10 percent): 2.6-3.0
      - Medium leverage (30 percent): 0-0.2
      - High leverage (150 percent): -9.4 to (-12.0)
    - Interpretation: High-leverage firms increase employment less and cut or fail to increase net investment even with positive sales shocks.
  - Response to a 10 percent negative sales shock:
    - Employment elasticity:
      - Low leverage: 1.5-1.6
      - High leverage: 1.6-1.7
    - Investment elasticity:
      - Low leverage: 2.6-3.0
      - High leverage: 8.9-11.8
    - Interpretation: Higher leverage magnifies cutbacks in employment and net investment when sales fall.
- Selected regression coefficients (Table IV.2):
  - Lagged dependent variable:
    - Employment growth: -0.260*** ; -0.282***
    - Investment growth: -0.562*** ; -0.568***
  - Change in sales: 0.155*** (employment); 0.257*** (investment)
  - Change in sales + x leverage (t-2): -0.029*** (employment); -0.896*** (investment)
  - Change in sales - x leverage (t-2): 0.011*** (employment); 0.425* (investment)
  - Change in sales x total assets (t-2): -0.000*** (employment); -0.000* (investment)
  - Total assets (t-2): -0.000*** (employment); 0.000 (investment)
  - Leverage (t-2): 0.004*** (employment); 0.438** (investment) ; alternate column 0.004*** and 0.548**
  - Constant terms: -0.014***, -1.259***, -0.018***, -1.299***
- Sample and fit:
  - Observations: Employment regressions 4,504,893 and 3,616,545; Investment regressions 5,292,963 and 4,648,142.
  - R-squared: 0.11 and 0.12 for employment; 0.23 for both investment regressions.
  - Number of companies: Employment regressions 1,422,218 and 1,132,501; Investment regressions 1,499,190 and 1,281,032.
  - Significance: *** p<0.01, ** p<0.05, * p<0.1.
- Policy implication:
  - High corporate leverage reduces responsiveness of employment and investment to positive demand shocks and magnifies contractions under negative shocks — suggesting corporate deleveraging or balance-sheet strengthening can support employment and investment responses.

### V. MARKET PRICING OF NPLs, PRICING GAP, AND NPL SALES EXERCISE
- Market pricing determinants:
  - Depends on insolvency regime effectiveness, expected time to recover residual value, servicing/legal fees, management costs, collateral deterioration, and investors’ return expectations.
- Pricing gap definition:
  - Shortfall of market price below net book value (haircut on net book value); sale at price below net book value reduces capital.
- Calculation framework and assumptions:
  - Two simplified variants: (i) zero pricing gap (selling price = net book value) or (ii) uniform standard haircut across countries.
  - Granular exercise uses country-specific haircuts reflecting uneven NPL distribution, credit risk-weightings, investor return expectations, and lower recovery under inefficient enforcement.
  - Selling price S equals reported net loan value less country-specific haircut, calculated as NPV after accounting for servicing/legal fees and management costs of 10 and 2 percent, respectively.
  - Specific assumptions:
    - unsecured portion = 20 percent of principal value, fully provisioned;
    - secured portion expected IRR = 10 percent p.a.;
    - collateral deteriorates by 5 percent;
    - servicing/legal fees M = 10 percent and management costs = 2 percent (percent of principal);
    - discount rate r = 10 percent; rc is rate of collateral decay; time t in years.
- Bank-level exercise assumptions:
  - NPLs reduced to historical averages (between 3 and 4 percent of gross loan book for most banks);
  - target capital adequacy ratio of 16 percent;
  - investor rate of return 10 percent.
- Foreclosure time sensitivity:
  - For countries with elevated expected foreclosure times (Bulgaria, Croatia, Cyprus, Czech Republic, Greece, Hungary, Italy, Poland, Romania, Serbia, Slovak Republic, Slovenia), foreclosure time reduced by up to two years to assess reform impact.
- Aggregate results under assumptions:
  - aggregate capital relief = €19 billion (or 0.1 percent of total assets of sample banks at end-2014).
  - potential unlock of new lending = €261 billion (or almost 2.5 percent of GDP), conditional on corresponding demand.
  - Countries projected to benefit most: Serbia, Slovenia, Romania, Bulgaria, Croatia, and, to a lesser extent, Ireland and Portugal.
- Range of additional lending capacity (country examples):
  - Ireland: some 39 percent of GDP
  - Serbia: 16 percent of GDP
  - Bulgaria and Croatia: 8 percent of GDP
  - Portugal: 5 percent of GDP
- Sensitivity to investor return expectations:
  - Reducing investor return expectations from 10 percent to 5 percent has large impact; example:
    - Italy: additional capital relief of almost €12 billion and about €118 billion (or 7 percent of GDP) in new lending.
- Scenarios where NPL sales may worsen capital positions:
  - Applying observed foreclosure times and a minimum investment return of 10 percent can imply large haircuts:
    - Greece: -29 percent haircut
    - Italy: -21 percent haircut
    - Bulgaria: -17 percent haircut
    - Croatia: -12 percent haircut
    - Portugal: -8 percent haircut
  - Under such conditions, aggregate capital relief from NPL disposal could be negative €10 billion (or 0.1 percent of GDP of selected countries at end-2014).
  - Note: substantial NPL disposals and supervisory pressure may decrease market collateral prices, imposing additional disposal losses not captured here.
- Selected scenario outcomes (Figure V.1 summary):
  - Uniform haircut results:
    - -10% haircut: EUR bln -60.0, % TA -0.1
    - -5% haircut: EUR bln 240.1, % TA 0.2
    - no haircut: EUR bln 540.2, % TA 0.5
  - Country-specific haircut:
    - 10% IRR and full foreclosure time: EUR bln -100.0, % TA -0.1
    - 10% IRR and foreclosure time reduced by 2 yrs.: EUR bln 190.1, % TA 0.2
    - 5% IRR and foreclosure time reduced by 2 yrs.: EUR bln 620.2, % TA 0.6

### VI. IMF SURVEY ON OBSTACLES TO NPL/DISTRESSED DEBT RESOLUTION
- Survey design and scope:
  - Two parts: country survey (authorities) and bank survey (cross-border banking groups).
  - Targeted countries: those where NPLs (or NPEs) exceeded 10 percent of total loans (or total assets) at any point during 2008-2014.
  - Country survey completed by 19 countries: 9 euro area members (Cyprus, Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovenia, Spain) and 10 non-euro area countries (Albania, Bosnia and Herzegovina (two jurisdictions), Croatia, Hungary, Iceland, Romania, Macedonia, Montenegro, San Marino, Serbia).
  - Bank survey completed by 10 banking groups (Alpha Bank, Intesa, NBG, Piraeus, Pro Credit, Raiffeisen, Societe Generale, Unicredit, Eurobank, Erste Group).
  - Scope: five obstacle areas — (i) informational obstacles; (ii) deficiencies in insolvency and debt enforcement systems; (iii) supervision and banks’ capacity to manage NPLs; (iv) obstacles to distressed debt market development; (v) tax and other obstacles.
  - Question types: qualitative ratings (high/medium/low/no concern/unknown) and factual yes/no items.
- Broad takeaways:
  - Legal framework and distressed debt markets rated as the most severe obstacles on average; information, supervisory, and taxation areas also significant.
  - Country authorities express higher concern about institutional obstacles than banks.
  - Distressed debt market, legal, and tax obstacles seen as more severe in non-euro area countries.
  - Specific concerns:
    - Information: deficiencies in public registers considered serious.
    - Legal framework: concerns about the overall judicial system often higher than corporate or personal insolvency frameworks.
    - Supervision: collateral-related issues rated of greater concern than banks’ capacity to manage NPLs or capitalization.
  - IMF survey legal obstacle score correlates approximately 45 percent with an average of World Bank Doing Business indicators on insolvency frameworks and contract enforcement.
  - Institutional deficiencies are positively correlated across areas.

### VII. PUBLIC REGISTERS, DEBT COUNSELING, SUPERVISION, AND OTHER INSTITUTIONAL ISSUES (SURVEY DETAIL HIGHLIGHTS)
- Public registers (selected percentages from survey):
  - Credit bureau coverage/features (All countries — NO / YES / N.A.):
    - Taxes and social security payments included? 80 / 20 / 0
    - Payments to utilities companies included? 70 / 30 / 0
    - Connected borrowers information included? 50 / 40 / 10
    - Credit scoring for individuals? 65 / 35 / 0
    - Requirement on frequency of updating credit info? 5 / 90 / 5
    - Use of credit info systems as part of regular credit decision? 0 / 100 / 0
  - Cadastral system centralized (All countries): 35 / 60 / 5
  - Public asset register identifies owner and asset characteristics (All countries): 10 / 70 / 20
  - Real estate transaction price registers include residential prices (All countries): 30 / 60 / 10
- Debt counseling and outreach (All countries — NO / YES / N.A.):
  - Free/subsidized personal budgeting service? 70 / 20 / 10
  - Free/subsidized legal advice for indebted households? 65 / 25 / 10
  - Credit management training/advice for SMEs? 55 / 30 / 15
- Supervisory reporting (All countries — NO / YES / N.A.):
  - Banks report using EBA NPL templates? 40 / 60 / 0
  - Banks required to report beyond basic EBA requirements? 25 / 75 / 0
- Consumer and data protection (All countries — NO / YES / N.A.):
  - Absence of restrictions on sharing personal info for debt workout? 65 / 30 / 5
- Real estate sales/auctions (All countries — NO / YES / N.A.):
  - Bilateral sales permitted for repossessed assets? 15 / 80 / 5
  - Information on upcoming sales/auctions publicly available? 5 / 90 / 5
  - Absence of blanket bans on sales/auctions? 35 / 50 / 15
- Corporate insolvency regime (selected all-country percentages — NO / YES / N.A.):
  - Bankruptcy/insolvency regime exists (credible threat)? 5 / 85 / 10
  - Private secured claims senior to public sector claims? 25 / 55 / 20
  - Out-of-court settlement mechanism? 25 / 55 / 20
  - Pre-pack procedures present? 35 / 45 / 20
- Household insolvency regime (All countries — NO / YES / N.A.):
  - Bankruptcy regime for consumers/households? 35 / 45 / 20
  - Out-of-court settlement/mediation mechanism? 35 / 40 / 25
- Judicial system (All countries — NO / YES / N.A.):
  - Specialized courts/judges for insolvency issues? 35 / 60 / 5
  - Insolvency administrators require professional certification? 10 / 80 / 10
  - Set time requirements for insolvency process? 35 / 55 / 10
- Supervisory framework — banks and supervisors (selected highlights):
  - Most banks have dedicated NPL workout units? 0 / 100 / 0
  - Banks able to outsource NPL management? 25 / 70 / 5
  - Banks required to have NPL strategies/action plans? 15 / 85 / 0
  - Banks required to have operational targets for NPL reduction? 70 / 30 / 0
  - Collateral valuations typically based on market prices? 15 / 85 / 0
  - Have banks been subject to granular asset quality reviews during 2012-14? 10 / 85 / 5
  - Have supervisors increased capital charges for NPLs? 85 / 15 / 0
  - Have supervisors imposed time limits on how long NPLs can be carried on banks’ balance sheets? 75 / 25 / 0
- Distressed debt market and taxation (selected highlights):
  - Third party banks including foreign banks allowed to buy NPLs from domestic banks? 10 / 85 / 5
  - Institutional investors allowed to buy NPLs? 10 / 75 / 15
  - Special servicing firms operate in the country? 25 / 60 / 15
  - Tax deductions for loan loss provisioning? 20 / 75 / 5
  - Tax deductions for loan write-off? 60 / 40 / 0
  - Blanket bans (moratoria) on foreclosures or auctions? 45 / 25 / 30

### VIII. INTEREST ACCRUAL ON NPLS — OBSERVATIONS AND REMEDIAL MEASURES
- Observations on IFRS interest accrual issues:
  - Accrual accounting records interest income on NPLs as earned even if borrower does not repay, distorting net interest margin and related metrics.
  - Unpaid interest capitalized into loan balance increases NPL stock; accrual can be substantial for large, delinquent NPL levels.
  - Provision coverage loses meaning when provisions match interest accrual, delaying recognition of loan deterioration.
- Recommended remedial measures:
  - Improve transparency:
    - Require banks to disclose separately (i) the increase in NPLs due to loan deterioration vs due to accrual of interest income; (ii) allocation of provisions between original loan principal and interest accrual.
  - Adopt a sound non-accrual principle:
    - Suspend interest accrual after a certain period consistent with NPL definition (e.g., impairment trigger or days past due – 90 or 180 days).
  - Charge-off/write down uncollectible portions:
    - Require prompt charge off/write down of uncollectible credits (accrued interest and principal).
    - Make charge-off rules-based using time passage thresholds (e.g., 180 or 365 days past due).
    - Legal framework must ensure bank retains judicial title and can collect defaulted loans, including via loan sales, after charge-off.

### IX. THE REGULATORY TREATMENT OF NPLS IN THE UNITED STATES — EARLY LOSS RECOGNITION
- Key distinctions and regulatory requirements:
  - IFRS and GAAP both apply the incurred loss approach, but a U.S. regulatory overlay limits managerial discretion, producing a more conservative treatment in the U.S.
  - Two key U.S. regulatory requirements:
    - (i) Banks must suspend and reverse interest income on NPLs once the loan is 90 days past due or is deemed uncollectible (non-accrual principle).
    - (ii) Banks must promptly charge off/write down the loan balance to recoverable collateral value after six months.
- Charge-off mechanics and collateral valuation:
  - Excess loan balance over recoverable value (less cost to sell) charged against loan loss reserve.
  - Collateral value determined at today’s “spot price” with no adjustment for forecasted increases.
  - Charge-off is not forgiveness of borrower’s debt; banks still judged on collection capabilities, including loan sales.
- Nonaccrual to accrual transition and loan modifications:
  - Nonaccrual loans may return to accrual after borrower makes a series of contractual payments.
  - Loan modifications subject to close regulatory scrutiny; require sound internal controls and MIS to monitor effectiveness.
- Effects on credit cycle, price discovery, and tax treatment:
  - Earlier recognition of credit losses aids earlier resolution or failure when capital is insufficient.
  - System NPLs peaked at 5 percent of loans in 2009 and declined to less than 2 percent thereafter.
  - Charge-off requirement reduces disincentives to sell NPLs, supporting earlier price discovery.
  - Tax incentives encourage early write-offs since provisioned loan losses are not tax deductible.
- Arrears management strategy and organization (key elements):
  - Segmentation by size/vintage, exposure type, counterparty, and risk to prioritize management.
  - Restructuring policies that foster sustainable solutions; forbearance for temporary issues but not for protracted inability to pay.
  - Standardize/industrialize arrears management: specialized call centers, teams by lending segment and case complexity, supervised outsourcing.
  - Technology: enhance IT for automation, monitoring, workflow management, and portfolio-level assessment.
- Monitoring and indicators:
  - Balance sheet indicators move too slowly; operational indicators (numbers of cases agreed) and financial indicators (cash collections) needed for immediate feedback.
  - Indicators should monitor performance across organizational hierarchy and define forward-looking targets consistent with capital planning and provisioning.

### X. PARTICIPATION OF PUBLIC CREDITORS, CORPORATE LAW OBSTACLES, AND AMCS
- Participation of public creditors:
  - Inclusion of public creditors generally makes restructuring more effective; treatment varies across countries.
  - International guidance:
    - UNCITRAL Legislative Guide recommends minimizing priorities, especially over secured claims (Recommendations 187 and 188).
    - World Bank Principle 12A: “public interests generally should not be given precedence over private rights.”
    - IMF notes tax privilege can incentivize tax authorities to delay collection and impede rehabilitation.
- Policy recommendations:
  - Ranking:
    - Avoid super-priorities over secured creditors.
    - Limit priorities to tax claims within specified periods (e.g., last 12 or 24 months).
    - Treat interest and penalties as unsecured or subordinated; allow principal limited preferential treatment.
    - VAT and employee withholding taxes may be ranked preferentially.
  - Restructuring and guidance:
    - Public claims should be restructured like private claims subject to predictable criteria and legal frameworks.
    - Enhance information sharing between private and public creditors via credit registers.
    - Provide clear guidance for tax officials’ participation and consider task forces in tax administrations.
    - Where capacity is limited, consider some automaticity in restructuring.
- Corporate law obstacles:
  - Shareholder rights (competence of shareholders to change capital, pre-emption rights) can hinder restructuring.
  - Reforms in some jurisdictions permit debt/equity swaps and capital-structure modifications without preserving shareholder veto rights (Germany 2012; Slovenia 2013; 2015 reforms in Italy and France).
- Selected AMC comparative data (excerpted examples):
  - Europe Securum (Sweden, Dec. 1992): Public 100%; SEK24bn; 10-15 years; transfer at net book value; no profit sharing.
  - NAMA (Ireland, Dec. 2009): €100mn; 51% private, 49% public; 10 years; transfer avg. 57% discount to nominal; valued at long term economic value.
  - SAREB (Spain, Dec. 2012): €1.2bn; 55% private, 45% public; 15 years; avg. discount 53%; no profit sharing.
  - BAMC (Slovenia, Feb. 2013): €204mn; 10 years; avg. discount 65%; no profit sharing.
  - SNB StabFund (Switzerland, Nov. 2008): $5.5bn repurchase option; $39.4 gross; $38.7 net; transfer 2% below book value; profit sharing arrangements specified.

*Prepared by Andreas (Andy) Jobst (EUR), Jean Portier, Luca Sanfilippo (MCM), Wolfgang Bergthaler, and Jose M. Garrido (LEG); IMF staff calculations and IMF Survey results as reported in the source document.*

### REFERENCES _____________________________________________________________________________________  40

### _sdn1519tbn - REFERENCES _____________________________________________________________________________________  40

### I. THE EU DEFINITION OF NPLS
- IMF FSI Compilation Guide (IMF, 2006) recommendation for reporting loans as non-performing:
  - (i) payments of principal and interest are past due by three months (90 days) or more, or
  - (ii) interest payments equal to three months (90 days) interest or more have been capitalized, refinanced, or rolled over (payment delayed by agreement).
- NPLs should also include loans with payments less than 90 days past due that are recognized as non-performing under national supervisory guidance.
- Supervisory guidance commonly references significant financial difficulty, bankruptcy, breach of contract, and treatment of restructured loans (Basle Committee Core Principle 18; Basel II).
- Heterogeneity across European national supervisory authorities:
  - 90 days past-due and bankruptcy commonly used as objective criteria.
  - Less consistency on discretionary criteria: restructured loans may not be classified as NPLs or may be immediately upgraded; some authorities allow past-due loans to be classified as performing if high-value collateral, guarantees, or other risk mitigants exist.
  - In more CESEE countries than advanced EU countries, the “debtor or customer view” approach is used: all loans to a given debtor are downgraded if any of the debtor’s loans is classified as an NPL.
- Empirical classification responses (percent answering “yes”), Table I.1:
  - Existence of collateral, guarantees or other credit risk mitigants: 83 (26 European countries (WB study) ) ; 55 (20 European countries with high NPLs)
  - Restructuring: 83 ; 60
  - Customer view (debtor approach): 74 ; 55
- January 2015 EU harmonization (Commission Implementing Regulation (EU) No. 680/2014 implementing technical standards submitted by EBA):
  - Non-performing exposures for supervisory reporting are defined as:
    - (i) material exposures more than 90 days past-due and/or
    - (ii) unlikely to be repaid in full without realization of collateral.
  - Exposures in default or impaired must be reported as non-performing; collateral is not taken into account in the categorization.
  - Debtor approach applies to non-retail exposures when past-due payments exceed 20 percent of the gross on-balance sheet exposures (and would apply to other companies in the group).
  - Forbearance applied to non-performing exposures: exposures remain classified as NPLs until there is no impairment or default, one year has passed, and there are no past-due amounts or concerns about full repayment according to post-forbearance conditions.
- Implication: EU harmonization may increase NPLs in countries where restructured loans were previously not stringently reported or where the debtor approach was not required.

*Source: TECHNICAL BACKGROUND NOTES, INTERNATIONAL MONETARY FUND*

### II. CREDIT GROWTH DETERMINANTS IN CESEE
- Dataset and method:
  - About 450 banks, period 2000-2014, average 6 years of observations per bank.
  - Dynamic panel estimation (system GMM / Arellano-Bond tests reported).
  - Instruments: lags of independent variable, first period lag of NPL, pre-tax income ratio, capital/asset ratio, GDP growth (t-1), and time and country dummies.
  - Data source: Bankscope, IMF International Financial Statistics.
- Main findings (summary from Table II.1 regression results):
  - Positive and significant predictors of real credit growth:
    - Growth in gross loans (in local currency terms), (t-1): coefficients reported across specifications: 0.192***; 0.225***; 0.131*; 0.185; 0.206** (standard errors in parentheses as in source).
    - GDP growth: coefficients across specifications: 1.114***; 1.350***; 1.153***; 0.850***; 1.073***.
  - Negative and significant predictors of real credit growth:
    - NPL ratio (t-1): coefficients include -0.464***; -0.531***; -0.389***; -0.352; -0.355***.
  - Capital asset ratio (measured as % of beginning period assets) is positive and significant in some specifications: 0.331***; 0.382***.
  - Pre-tax operating income / Avg. assets % positive and significant in several specifications: 1.522***; 1.028*; 1.575***.
- Regression diagnostics and sample:
  - Observations: 1,052; 1,052; 1,000; 793; 793 (across columns).
  - Number of idBS: 257; 257; 278; 223; 223.
  - Arellano-Bond test for AR(1): reported p-values 0.000675; 0.000338; 0.000291; 0.00287; 0.000922.
  - Arellano-Bond test for AR(2): 0.673; 0.637; 0.730; 0.714; 0.693.
- Interpretation:
  - Higher NPL ratio, low capital-asset ratio, and low pre-tax earnings (in percent of assets) are associated with lower credit growth.
  - High GDP growth is associated with stronger credit growth.

*Source: TECHNICAL BACKGROUND NOTES, INTERNATIONAL MONETARY FUND*

### III. MACRO-FINANCIAL EFFECTS OF HIGH NPLS
- Literature synthesis:
  - Bank default rates follow cyclical patterns: fall in expansions, rise in downturns (Marcucci and Quagliariello, 2008).
  - Negative relation between changes in the output gap and loan write-offs (Hoggarth and others, 2005).
  - Banks’ asset quality influenced by short-term nominal interest rate, industrial production, stock market performance, business confidence (Kalirai and Scheicher, 2002).
  - “Gambling for resurrection”: banks with low capital buffers may increase loan portfolio riskiness, leading to further asset impairments (Keeton and Morris, 1987).
- Feedback from NPLs to economy:
  - High NPLs undermine banks’ capacity to support economic activity: raise cost of capital, increase lending rates, reduce lending volumes, increase risk aversion (Diawan and Rodrik, 1992; Kashyap and others, 1994; Krosner and others, 2007).
  - Quantitative estimates (impact of 1 percentage point increase in NPL ratio on net lending):
    - Around 0.8 percentage points reduction in net lending (summary statement).
  - Figure III.1 literature boxplot summarized impacts (Impact on credit growth / Impact on GDP growth after 1/2/3 years):
    - Dovern and others (2010): ≈ -0.4 pcp after two years (impact on lending); n.a. for some horizons.
    - Espinoza and Prasad (2010): -0.4 pcp after one year / -0.7 pcp after two years.
    - Nkusu (2011): -0.3 pcp after one year / -0.2 pcp after two years.
    - De Bock and Demyanets (2012): -0.5 pcp after one year / -1.7 pcp after two years.
    - Klein (2013): -0.8 pcp after one year / -0.6 pcp after two years.
    - Bending and others (2014): n.a. after one year / -0.8 pcp after two years.
- Distributional effects:
  - Reduced lending capacity disproportionately affects firms most dependent on bank finance: smaller firms, firms with fewer tangible assets, and firms producing less tradable goods.
  - Empirical examples:
    - Japan post-early-1990s bubble: deterioration in banks’ balance sheets hindered investment by bank-dependent firms (Inaba and others, 2005).
    - SMEs in Europe: tight financial conditions have been a drag on recovery (Klein, 2013).
- Debt overhang channel:
  - Persistent NPLs linked to private sector debt overhang, depressing credit demand.
  - Goretti and Souto (2013): using aggregate firm-level data for 2000-2011 in the euro area periphery, find negative effect of corporate debt overhang on firms’ investment.
- Overall synthesis:
  - Empirical studies find significant negative relations between NPLs and both lending and GDP growth; median/mean impacts cluster around reductions of lending and GDP growth within the ranges reported above.

*Source: TECHNICAL BACKGROUND NOTES, INTERNATIONAL MONETARY FUND*

### IV. THE IMPACT OF CORPORATE LEVERAGE ON INVESTMENT AND EMPLOYMENT
- Objective and method:
  - Estimate how firm-level leverage affects elasticity of employment and net investment to sales shocks, allowing different leverage impacts under positive and negative sales shocks.
  - Regression model uses firm-level annual data (2005-2013) from ORBIS for countries with high NPL ratios (above 10 percent at peak): Cyprus, Spain, Greece, Ireland, Italy, Portugal, Iceland, Croatia, Bulgaria, Hungary, Latvia, Lithuania, Serbia, Slovenia.
  - Structural variables lagged by two years; estimated using fixed effects.
- Key quantitative findings (Table IV.1 and IV.2 summaries):
  - Response to a 10 percent positive sales shock (employment and net investment):
    - Employment elasticity:
      - Low leverage (0-10 percent): 1.5-1.6
      - Medium leverage (30 percent): 1.4-1.5
      - High leverage (150 percent): 1.1-1.1
    - Investment growth response:
      - Low leverage (0-10 percent): 2.6-3.0
      - Medium leverage (30 percent): 0-0.2
      - High leverage (150 percent): -9.4 to (-12.0)
    - Interpretation: High-leverage firms increase employment less and cut or fail to increase net investment even with positive sales shocks; low/no leverage firms raise employment and net investment more.
  - Response to a 10 percent negative sales shock:
    - Employment elasticity increases with leverage:
      - Low leverage: 1.5-1.6
      - High leverage: 1.6-1.7
    - Investment elasticity increases markedly with leverage:
      - Low leverage: 2.6-3.0
      - High leverage: 8.9-11.8
    - Interpretation: Higher leverage exacerbates cutbacks in employment and net investment when sales fall.
- Regression coefficients (selected, from Table IV.2):
  - Lagged dependent variable:
    - Employment growth: -0.260*** ; -0.282*** (two reported columns)
    - Investment growth: -0.562*** ; -0.568***
  - Change in sales: 0.155*** (employment); 0.257*** (investment)
  - Change in sales + x leverage (t-2): -0.029*** (employment); -0.896*** (investment)
  - Change in sales - x leverage (t-2): 0.011*** (employment); 0.425* (investment)
  - Change in sales x total assets (t-2): -0.000*** (employment); -0.000* (investment)
  - Total assets (t-2): -0.000*** (employment); 0.000 (investment)
  - Leverage (t-2): 0.004*** (employment); 0.438** (investment) ; alternate column 0.004*** and 0.548**
  - Constant terms reported: -0.014***, -1.259***, -0.018***, -1.299***
- Sample, fit, and significance:
  - Observations: Employment regressions 4,504,893 and 3,616,545; Investment regressions 5,292,963 and 4,648,142 (two sample groupings).
  - R-squared: 0.11 and 0.12 for employment regressions; 0.23 for both investment regressions.
  - Number of companies: Employment regressions 1,422,218 and 1,132,501; Investment regressions 1,499,190 and 1,281,032.
  - Significance notation: *** p<0.01, ** p<0.05, * p<0.1.
- Policy-relevant implications:
  - High corporate leverage reduces the responsiveness of employment and investment to positive demand shocks and magnifies contractions under negative shocks, implying that corporate deleveraging or measures that reduce balance-sheet fragility can support stronger employment and investment responses to growth opportunities.

*Source: TECHNICAL BACKGROUND NOTES, INTERNATIONAL MONETARY FUND*

### 1.      The market price of NPLs typically reflects several factors, such as the effectiveness of

### _sdn1519tbn - 1.      The market price of NPLs typically reflects several factors, such as the effectiveness of 

### Market pricing of NPLs
- Market price reflects: effectiveness of the insolvency regime and the rate of return demanded by investors.
- Market price depends on: expected time to recover residual value of distressed assets (lower where foreclosure times are longer and debt enforcement regimes weaker) and expected return on investment consistent with general profit expectations in distressed debt markets.
- In the exercise, banks reduce the current stock of NPLs (end-2014) by selling distressed loans to external investors, reducing the regulatory capital charge of their loan book in proportion to the share of (partially provisioned) NPLs (and their applicable credit risk weight).

### Definition and mechanics of the “pricing gap”
- A shortfall of the market price below the net book value of NPLs is termed the “pricing gap” (also expressed as a “haircut” on the net book value).
- Sale of loans results in a loss (gain) on disposal and reduces (increases) capital if the selling price lies below (above) the net book value (gross value of NPLs after deducting the current level of specific loan loss reserves).
- The “pricing gap” varies significantly across countries depending on provisioning levels, insolvency regime effectiveness, and investor return expectations.

### Calculation assumptions and formula components
- Simplified calculation variants in the main text: (i) pricing gap assumed zero (selling price = net book value of NPLs) or (ii) uniform standard haircut applied across countries.
- Granular exercise: uniform haircut replaced with country-specific haircuts that account for uneven distribution and different credit risk-weightings of NPLs and reflect return expectations of external investors and lower asset recovery under inefficient debt enforcement regimes.
- Selling price S of an NPL is the reported net loan value less the country-specific haircut, calculated as the net present value of the loan after accounting for servicing/legal fees and management costs of 10 and 2 percent, respectively.
- Assumptions used in the granular calculation:
  - unsecured portion = 20 percent of principal value, fully provisioned;
  - secured portion depreciates at expected return of distressed debt investors = 10 percent p.a. (IRR);
  - collateral deteriorates by 5 percent;
  - servicing/legal fees M = 10 percent and management costs = 2 percent (as a percent of principal value);
  - r represents discount rate (IRR) = 10 percent; rc is rate of collateral decay; time t in years.
- Calculation expressed for a principal loan value at unity (formula provided in source).

### Capital relief, lending capacity, and country impacts (assumptions and results)
- Bank-level exercise assumptions:
  - NPLs reduced to a level consistent with historical averages (between 3 and 4 percent of gross loan book for most banks);
  - target capital adequacy ratio of 16 percent;
  - offer a 10 percent rate of return on investment.
- For countries with elevated expected foreclosure times (Bulgaria, Croatia, Cyprus, Czech Republic, Greece, Hungary, Italy, Poland, Romania, Serbia, Slovak Republic, and Slovenia), expected foreclosure time (ECB, 2009) reduced by up to two years to assess structural reform impact on pricing gap.
- Aggregate results under these assumptions:
  - aggregate capital relief = €19 billion (or 0.1 percent of total assets of sample banks at end-2014) (Annex Figure V.1., chart 4).
  - potential unlock of new lending = €261 billion (or almost 2.5 percent of GDP), conditional on corresponding demand for new loans.
- Countries projected to benefit most under these conditions: Serbia, Slovenia, Romania, Bulgaria, Croatia, and, to a lesser extent, Ireland and Portugal.

### Range of additional lending capacity and sensitivity to investor return expectations
- Additional lending capacity would range across countries:
  - some 39 percent of GDP in Ireland,
  - 16 percent of GDP in Serbia,
  - 8 percent of GDP in Bulgaria and Croatia,
  - 5 percent of GDP in Portugal.
- Reducing investors’ return expectations from 10 percent to 5 percent has a large impact:
  - example: in Italy, this would result in additional capital relief of almost €12 billion and about €118 billion (or 7 percent of GDP) in new lending (Figure V.1, Chart 5).

### Scenarios where NPL sales may worsen capital positions
- Applying observed foreclosure times and imposing a minimum market-based investment return of 10 percent can imply large haircuts relative to net book value in some countries, for example:
  - Greece: -29 percent haircut,
  - Italy: -21 percent haircut,
  - Bulgaria: -17 percent haircut,
  - Croatia: -12 percent haircut,
  - Portugal: -8 percent haircut.
- Under such conditions, aggregate capital relief from NPL disposal could be negative €10 billion (or 0.1 percent of GDP of selected countries at end-2014).
- Note from source: if NPL disposals are substantial, a high haircut may jeopardize capital adequacy of the ceding bank; anticipation of supervisory push for NPL resolution might decrease market price of collateral, imposing additional disposal losses not captured in this calculation.

### Summary table (selected scenario outcomes from source Figure V.1)
- Uniform haircut results:
  - -10% haircut: EUR bln -60.0, % TA -0.1
  - -5% haircut: EUR bln 240.1, % TA 0.2
  - no haircut: EUR bln 540.2, % TA 0.5
- Country-specific haircut, based on:
  - 10% IRR and full foreclosure time: EUR bln -100.0, % TA -0.1
  - 10% IRR and foreclosure time reduced by 2 yrs.: EUR bln 190.1, % TA 0.2
  - 5% IRR and foreclosure time reduced by 2 yrs.: EUR bln 620.2, % TA 0.6

### IMF Survey on Obstacles to NPL/Distressed Debt Resolution — design and scope
- Survey design and participants:
  - Two parts: (i) country survey completed by country authorities and (ii) bank survey completed by cross-border banking groups operating in jurisdictions covered.
  - Targeted countries: those where NPLs (or NPEs) exceeded 10 percent of total loans (or total assets) at any point during 2008-2014.
  - Country survey completed by 19 countries: 9 euro area members (Cyprus, Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovenia, and Spain) and 10 non-euro area countries (Albania, Bosnia and Herzegovina (two jurisdictions), Croatia, Hungary, Iceland, Romania, Macedonia, Montenegro, San Marino, and Serbia).
  - Bank survey completed by 10 banking groups (Alpha Bank, Intesa, NBG, Piraeus, Pro Credit, Raiffeisen, Societe Generale, Unicredit, Eurobank, and Erste Group).
- Survey scope: five broad areas of potential obstacles to NPL resolution:
  - (i) informational obstacles;
  - (ii) deficiencies in insolvency and debt enforcement systems;
  - (iii) challenges related to supervision and banks’ capacity to manage NPLs;
  - (iv) obstacles to distressed debt market development;
  - (v) tax and other obstacles.
- Question types:
  - Qualitative (country and bank surveys): respondents rated level of concern (high, medium, low/no concern, unknown) and provided detailed comments.
  - Factual (country survey): yes/no questions on presence/absence of specific impediments; responses presented in Tables VI.1-4 in source.

### Broad takeaways from the IMF Survey
- Relative severity by area:
  - legal framework and distressed debt markets are the two areas with, on average, the most severe obstacles to NPL resolution; information, supervisory, and taxation areas also show significant obstacles (Figure VI.1).
- Authorities vs. banks:
  - country authorities tend to express a higher degree of concern about institutional obstacles than banks.
- Euro area vs. non-euro area:
  - differences in perceived severity between euro area and non-euro area countries are minor for information and supervision, but distressed debt market, legal, and tax obstacles are seen as more severe in non-euro area countries.
- Specific institutional concerns (average across respondents):
  - Information: deficiencies in public registers are viewed as more serious than other informational obstacles.
  - Legal framework: concerns about the overall judicial system are generally higher than concerns about corporate or personal insolvency frameworks; deficiencies in insolvency frameworks (especially for households) are notably higher in non-euro area countries.
  - Supervision: collateral-related issues are of greater concern than banks’ capacity to manage NPLs or banks’ capitalization.
- Survey scores broadly consistent with other international indicators (e.g., correlation between IMF survey-based legal obstacle score and an average of World Bank Doing Business indicators on insolvency frameworks and contract enforcement ~45 percent).
- Institutional deficiencies are correlated: informational deficiencies and other institutional obstacles tend to be significantly positively correlated.

*Prepared by Andreas (Andy) Jobst (EUR), Jean Portier, and Luca Sanfilippo (both MCM); IMF staff calculations and IMF Survey results as reported in the source document.*

### 1. PUBLIC REGISTERS

### _sdn1519tbn - 1. PUBLIC REGISTERS

### 1. PUBLIC REGISTERS — Limitations and Coverage
- Credit bureau limitations (All countries — NO / YES / N.A.):
  - Are taxes and social security payments included? 80 / 20 / 0
  - Are payments to utilities companies included? 70 / 30 / 0
  - Is information on connected borrowers (family or business links) included? 50 / 40 / 10
  - Is information on trade credits included? 50 / 50 / 0
  - Is there credit scoring for individuals? 65 / 35 / 0
  - Is there credit scoring for SMEs? 55 / 45 / 0
  - Is there credit scoring for companies? 55 / 45 / 0
  - Is there a requirement on the frequency of updating the credit info? 5 / 90 / 5
  - Is the use of credit info systems a part of the regular process providing credit? 0 / 100 / 0
- Credit bureau limitations (Euro area countries — NO / YES / N.A.):
  - Taxes and social security: 78 / 22 / 0
  - Utilities payments: 67 / 33 / 0
  - Connected borrowers: 33 / 67 / 0
  - Trade credits: 44 / 56 / 0
  - Credit scoring for individuals: 78 / 22 / 0
  - Credit scoring for SMEs: 56 / 44 / 0
  - Credit scoring for companies: 56 / 44 / 0
  - Frequency update requirement: 0 / 100 / 0
  - Use as part of regular credit process: 0 / 100 / 0
- Credit bureau limitations (Non-euro area countries — NO / YES / N.A.):
  - Taxes and social security: 82 / 18 / 0
  - Utilities payments: 73 / 27 / 0
  - Connected borrowers: 64 / 18 / 18
  - Trade credits: 55 / 45 / 0
  - Credit scoring for individuals: 55 / 45 / 0
  - Credit scoring for SMEs: 55 / 45 / 0
  - Credit scoring for companies: 55 / 45 / 0
  - Frequency update requirement: 9 / 82 / 9
  - Use as part of regular credit process: 0 / 100 / 0

### 1.2 Cadastral system limitations
- All countries (NO / YES / N.A.):
  - Is it centralized (digital/online vs paper-based)? 35 / 60 / 5
  - Does it cost less than €10 to conduct a credit search on an individual? 10 / 90 / 0
  - Does it cost less than €25 to conduct a credit search on a business? 10 / 90 / 0
- Euro area countries (NO / YES / N.A.):
  - Centralized: 22 / 78 / 0
  - Cost < €10 individual search: 22 / 78 / 0
  - Cost < €25 business search: 22 / 78 / 0
- Non-euro area countries (NO / YES / N.A.):
  - Centralized: 45 / 45 / 9
  - Cost < €10 individual search: 0 / 100 / 0
  - Cost < €25 business search: 0 / 100 / 0

### 1.3 Public asset register limitations
- All countries (NO / YES / N.A.):
  - Does it identify the owner and the asset characteristics? 10 / 70 / 20
  - Are the registers available to the public to conduct searches? 35 / 55 / 10
- Euro area countries (NO / YES / N.A.):
  - Owner and characteristics: 22 / 67 / 11
  - Public searches available: 22 / 78 / 0
- Non-euro area countries (NO / YES / N.A.):
  - Owner and characteristics: 0 / 73 / 27
  - Public searches available: 45 / 36 / 18

### 1.4 Real estate transaction price public registers
- All countries (NO / YES / N.A.):
  - Are prices of all residential real estate transactions included? 30 / 60 / 10
  - Are prices of all commercial real estate transactions included? 35 / 55 / 10
  - Is detailed description of property characteristics included? 35 / 55 / 10
  - Is information updated at least monthly? 30 / 55 / 15
  - Is the general public able to conduct searches? 50 / 40 / 10
  - Are the costs to conduct a search less than €10 on average? 10 / 60 / 30
- Euro area countries (NO / YES / N.A.):
  - Residential prices included: 11 / 89 / 0
  - Commercial prices included: 22 / 78 / 0
  - Property characteristics detailed: 33 / 67 / 0
  - Updated at least monthly: 33 / 56 / 11
  - Public searches: 33 / 56 / 11
  - Cost < €10: 0 / 67 / 33
- Non-euro area countries (NO / YES / N.A.):
  - Residential prices included: 45 / 36 / 18
  - Commercial prices included: 45 / 36 / 18
  - Property characteristics detailed: 36 / 45 / 18
  - Updated at least monthly: 27 / 55 / 18
  - Public searches: 64 / 27 / 9
  - Cost < €10: 18 / 55 / 27

### Notes on presentation in source
- For negative responses, questions where percentage of respondents exceeded 75 percent are highlighted in red, and those between 50 and 75 percent are highlighted in yellow.

---

### 2. DEBT COUNSELING AND OUTREACH
- All countries (NO / YES / N.A.):
  - Is there a free or subsidized personal budgeting service? 70 / 20 / 10
  - Is there a free or subsidized legal advice services for indebted households? 65 / 25 / 10
  - Is there an institution that provides credit management training/advice for SMEs? 55 / 30 / 15
- Euro area countries (NO / YES / N.A.):
  - Personal budgeting service: 67 / 33 / 0
  - Legal advice services: 67 / 33 / 0
  - Credit management training for SMEs: 33 / 56 / 11
- Non-euro area countries (NO / YES / N.A.):
  - Personal budgeting service: 73 / 9 / 18
  - Legal advice services: 64 / 18 / 18
  - Credit management training for SMEs: 73 / 9 / 18

### 3. SUPERVISORY REPORTING
- All countries (NO / YES / N.A.):
  - Do banks report using EBA NPL reporting templates? 40 / 60 / 0
  - Are banks required to report to supervisor beyond basic EBA NPL reporting requirements? 25 / 75 / 0
- Euro area countries (NO / YES / N.A.):
  - EBA NPL reporting templates: 11 / 89 / 0
  - Required to report beyond basic EBA: 11 / 89 / 0
- Non-euro area countries (NO / YES / N.A.):
  - EBA templates: 64 / 36 / 0
  - Report beyond basic EBA: 36 / 64 / 0

### 4. CONSUMER AND DATA PROTECTION
- All countries (NO / YES / N.A.):
  - Absence of restrictions on sharing of personal info for debt workout purposes? 65 / 30 / 5
- Euro area countries: 67 / 33 / 0
- Non-euro area countries: 64 / 27 / 9

### 5. REAL ESTATE SALES/AUCTIONS
- All countries (NO / YES / N.A.):
  - Are bilateral sales permitted for repossessed assets? 15 / 80 / 5
  - Is information on upcoming sales/auctions publicly available? 5 / 90 / 5
  - Absence of any blanket bans on sales/auctions? 35 / 50 / 15
- Euro area countries:
  - Bilateral sales permitted: 22 / 78 / 0
  - Upcoming sales information publicly available: 11 / 89 / 0
  - Absence of blanket bans: 33 / 56 / 11
- Non-euro area countries:
  - Bilateral sales permitted: 9 / 82 / 9
  - Upcoming sales information publicly available: 0 / 91 / 9
  - Absence of blanket bans: 36 / 45 / 18

---

### Table VI.2 — Corporate insolvency regime (obstacles related to legal framework)
- All countries (NO / YES / N.A.):
  - Is there a bankruptcy/insolvency regime (credible threat of bankruptcy)? 5 / 85 / 10
  - Do claims of private secured creditors have seniority over public sector claims? 25 / 55 / 20
  - Do private unsecured claims have priority over public sector claims? 50 / 30 / 20
  - Can public creditors agree to partial debt servicing? 10 / 65 / 25
  - Is there a process for clearance of arrears to public sector? 15 / 55 / 30
  - Is there a process for clearance of arrears to public sector linked to the private sector restructuring? 30 / 40 / 30
  - Are there pre-pack procedures for fast approval of debtor/creditor agreed restructuring plans? 35 / 45 / 20
  - Is there an out-of-court settlement mechanism? 25 / 55 / 20
  - Are there special in-court and out-of-court procedures for micro and small enterprises? 45 / 35 / 20
  - Is it possible to limit shareholders’ decisions as part of business restructuring? 45 / 35 / 20
  - Is it possible to change the company’s management in all debt restructuring procedures? 35 / 45 / 20
  - Can assets of a company (under debt restructuring) be sold through auctions? 15 / 60 / 25
  - Can assets of a company (under debt restructuring) be sold through open-market bilateral sales? 10 / 65 / 25
- Euro area countries (NO / YES / N.A.):
  - Bankruptcy/insolvency regime: 0 / 100 / 0
  - Private secured seniority over public: 33 / 44 / 22
  - Private unsecured priority over public: 56 / 44 / 0
  - Public creditors can agree partial servicing: 11 / 89 / 0
  - Clearance of arrears to public sector: 0 / 89 / 11
  - Clearance linked to private restructuring: 11 / 67 / 22
  - Pre-pack procedures: 33 / 67 / 0
  - Out-of-court settlement mechanism: 22 / 78 / 0
  - Special procedures for micro and small enterprises: 33 / 67 / 0
  - Limit shareholders’ decisions: 56 / 44 / 0
  - Change company management in restructuring: 67 / 33 / 0
  - Assets sold through auctions: 22 / 78 / 0
  - Open-market bilateral sales: 11 / 89 / 0
- Non-euro area countries (NO / YES / N.A.):
  - Bankruptcy/insolvency regime: 9 / 73 / 18
  - Private secured seniority over public: 18 / 64 / 18
  - Private unsecured priority over public: 45 / 18 / 36
  - Public creditors can agree partial servicing: 9 / 45 / 45
  - Clearance of arrears to public sector: 27 / 27 / 45
  - Clearance linked to private restructuring: 45 / 18 / 36
  - Pre-pack procedures: 36 / 27 / 36
  - Out-of-court settlement mechanism: 27 / 36 / 36
  - Special procedures for micro and small enterprises: 55 / 9 / 36
  - Limit shareholders’ decisions: 36 / 27 / 36
  - Change company management in restructuring: 9 / 55 / 36
  - Assets sold through auctions: 9 / 45 / 45
  - Open-market bilateral sales: 9 / 45 / 45

### Table VI.2 — Household insolvency regime
- All countries (NO / YES / N.A.):
  - Is there a bankruptcy regime for consumers/households? 35 / 45 / 20
  - Are individual entrepreneurs eligible for that process? 15 / 50 / 35
  - Is there an out-of-court settlement/mediation mechanism? 35 / 40 / 25
- Euro area countries:
  - Consumers/households regime: 11 / 89 / 0
  - Individual entrepreneurs eligible: 22 / 78 / 0
  - Out-of-court settlement/mediation: 56 / 33 / 11
- Non-euro area countries:
  - Consumers/households regime: 55 / 9 / 36
  - Individual entrepreneurs eligible: 9 / 27 / 64
  - Out-of-court settlement/mediation: 18 / 45 / 36

### Table VI.2 — Judicial system
- All countries (NO / YES / N.A.):
  - Specialized courts or judges for insolvency issues? 35 / 60 / 5
  - Personal insolvency related court fees/charges within a reasonable range? 40 / 35 / 25
  - Do insolvency administrators require professional certification? 10 / 80 / 10
  - Is remuneration of insolvency practitioners conditional on asset liquidation? 30 / 50 / 20
  - Are there set time requirements for insolvency process? 35 / 55 / 10
- Euro area countries:
  - Specialized courts/judges: 56 / 44 / 0
  - Court fees reasonable: 22 / 67 / 11
  - Administrators require certification: 11 / 89 / 0
  - Remuneration conditional on liquidation: 56 / 44 / 0
  - Set time requirements: 0 / 100 / 0
- Non-euro area countries:
  - Specialized courts/judges: 18 / 73 / 9
  - Court fees reasonable: 55 / 9 / 36
  - Administrators require certification: 9 / 73 / 18
  - Remuneration conditional on liquidation: 9 / 55 / 36
  - Set time requirements: 64 / 18 / 18

---

### Table VI.3 — Supervisory framework obstacles (banks and supervisors)

1. Banks — NPL Management Issues
- All countries (NO / YES / N.A.):
  - Most banks have dedicated NPL workout units or separate NPL management? 0 / 100 / 0
  - Banks able to outsource NPL management? 25 / 70 / 5
  - Banks required to have NPL management strategies/action plans? 15 / 85 / 0
  - Banks required to have operational targets for NPL reduction? 70 / 30 / 0
  - Mechanism for interbank coordination on individual debtor cases? 45 / 55 / 0
  - Mechanism for coordination between private and public creditors on individual debtor cases? 70 / 25 / 5
  - Used restructuring tools during 2012-14 (interest-only loans): 20 / 55 / 25
  - Used restructuring tools during 2012-14 (debt-to-equity swaps): 40 / 30 / 30
  - Used reducing repayments by warehousing a proportion of debt: 30 / 45 / 25
  - Used performance based write-off of a proportion of the debt: 30 / 35 / 35
  - Used other tools: 35 / 20 / 45
  - NPL disposals used during 2012-14 (portfolio sales): 20 / 65 / 15
  - Transfer to private asset management companies: 45 / 30 / 25
  - Transfer to public asset management companies: 70 / 15 / 15
- Euro area countries:
  - Dedicated NPL units: 11 / 89 / 0
  - Outsource NPL management: 33 / 67 / 0
  - Required NPL strategies/action plans: 22 / 78 / 0
  - Operational targets for NPL reduction: 78 / 22 / 0
  - Interbank coordination mechanism: 67 / 33 / 0
  - Coordination private/public creditors: 78 / 11 / 11
  - Interest-only loans used: 22 / 67 / 11
  - Debt-to-equity swaps used: 56 / 22 / 22
  - Reducing repayments by warehousing used: 44 / 44 / 11
  - Performance based write-off used: 44 / 22 / 33
  - Other tools used: 44 / 22 / 33
  - Portfolio sales: 44 / 44 / 11
  - Transfer to private AMCs: 67 / 22 / 11
  - Transfer to public AMCs: 67 / 22 / 11
- Non-euro area countries:
  - Dedicated NPL units: 0 / 100 / 0
  - Outsource NPL management: 27 / 64 / 9
  - Required NPL strategies/action plans: 18 / 82 / 0
  - Operational targets for NPL reduction: 64 / 36 / 0
  - Interbank coordination mechanism: 27 / 73 / 0
  - Coordination private/public creditors: 64 / 36 / 0
  - Interest-only loans used: 18 / 45 / 36
  - Debt-to-equity swaps used: 27 / 36 / 36
  - Reducing repayments by warehousing used: 18 / 45 / 36
  - Performance based write-off used: 18 / 45 / 36
  - Other tools used: 27 / 18 / 55
  - Portfolio sales: 9 / 73 / 18
  - Transfer to private AMCs: 27 / 36 / 36
  - Transfer to public AMCs: 73 / 9 / 18

2. Collateral and related issues
- All countries:
  - Collateral valuations typically based on market prices? 15 / 85 / 0
  - Requirement to apply a real estate valuation standard (e.g. RICS or IVS)? 30 / 65 / 5
- Euro area countries:
  - Market-based valuations: 33 / 67 / 0
  - Valuation standard requirement: 33 / 67 / 0
- Non-euro area countries:
  - Market-based valuations: 9 / 91 / 0
  - Valuation standard requirement: 27 / 64 / 9

3. Capital adequacy and supervisory actions
- All countries:
  - Have banks been subject to granular asset quality reviews during 2012-14? 10 / 85 / 5
  - Have banks been able to fulfill capital needs by tapping private markets? 30 / 70 / 0
  - Have banks been forced to dispose of assets in order to deleverage? 65 / 35 / 0
  - Does the regulator assess the conservatism and consistency of loan loss provisions during on-site inspections? 5 / 95 / 0
- Euro area countries:
  - Asset quality reviews: 11 / 89 / 0
  - Fulfilled capital needs via private markets: 33 / 67 / 0
  - Forced asset disposals to deleverage: 44 / 56 / 0
  - Regulator assesses provisions on-site: 22 / 78 / 0
- Non-euro area countries:
  - Asset quality reviews: 18 / 73 / 9
  - Fulfilled capital needs via private markets: 36 / 64 / 0
  - Forced asset disposals to deleverage: 82 / 18 / 0
  - Regulator assesses provisions on-site: 0 / 100 / 0

4. Supervisors (practices and incentives)
- All countries:
  - Supervisors undertaken thematic review of banks’ NPL management capacity during 2012-14? 15 / 80 / 5
  - Supervisors issued formal guidelines to banks on NPL management practices? 35 / 65 / 0
  - On-site supervision team includes specialists/advisors with NPLs? 60 / 40 / 0
  - Have supervisors increased capital charges for NPLs? 85 / 15 / 0
  - Have supervisors imposed time limits on how long NPLs can be carried on banks’ balance sheets? 75 / 25 / 0
  - Have supervisors incentivized banks to reduce reliance on collateral through increased provisioning? 50 / 50 / 0
  - Have supervisors incentivized banks to reduce reliance on collateral through assessment of valuation practices? 25 / 75 / 0
  - Is there a licensing and regulatory regime to enable non-banks to own or manage NPLs? 75 / 25 / 0
- Euro area countries:
  - Thematic reviews: 22 / 67 / 11
  - Formal guidelines: 22 / 78 / 0
  - On-site NPL specialists: 56 / 44 / 0
  - Increased capital charges for NPLs: 89 / 11 / 0
  - Time limits on carrying NPLs: 89 / 11 / 0
  - Incentivized reduction reliance on collateral through provisioning: 78 / 22 / 0
  - Incentivized reduction reliance through valuation assessment: 44 / 56 / 0
  - Licensing/regime for non-banks to manage NPLs: 78 / 22 / 0
- Non-euro area countries:
  - Thematic reviews: 18 / 82 / 0
  - Formal guidelines: 55 / 45 / 0
  - On-site NPL specialists: 73 / 27 / 0
  - Increased capital charges for NPLs: 82 / 18 / 0
  - Time limits on carrying NPLs: 64 / 36 / 0
  - Incentivized reduction reliance through provisioning: 27 / 73 / 0
  - Incentivized reduction through valuation assessment: 18 / 82 / 0
  - Licensing/regime for non-banks to manage NPLs: 82 / 18 / 0

---

### Table VI.4 — Distressed debt market, taxation and other institutional or policy issues

1. Market for NPLs / Distressed debt
- All countries:
  - Are third party banks, including foreign banks, allowed to buy NPLs from domestic banks? 10 / 85 / 5
  - Are institutional investors allowed to buy NPLs from domestic banks? 10 / 75 / 15
  - Are foreign institutional investors allowed to buy/own NPLs? 20 / 70 / 10
  - Do special servicing firms operate in the country? 25 / 60 / 15
  - Can banks sell denounced loans (legally and economically written off)? 15 / 75 / 10
  - Can banks set up private asset management companies in cooperation with investment firms? 5 / 85 / 10

2. Taxation and related policy issues
- All countries:
  - Are there tax deductions for loan loss provisioning? 20 / 75 / 5
  - Is there a tax loss carry forward mechanism such as a deferred tax asset? 35 / 65 / 0
  - Are there tax deductions for loan write-off? 60 / 40 / 0
  - Are there tax deductions for collateral sale? 75 / 25 / 0
  - Debtors are not charged capital gains taxes upon debt write-off/restructuring at more favorable terms? 40 / 40 / 20
  - Can public creditors provide debt write-off? 75 / 25 / 0
- Other institutional/policy obstacles:
  - Are there blanket bans (moratoria) on foreclosures or auctions? 45 / 25 / 30
  - Were there any specific measures to tackle debtors that can afford to pay but choose not to? 45 / 25 / 30

---

### VII. INTEREST ACCRUAL ON NPLS — Key points and remedial measures
- Observations on IFRS treatment of NPL interest accrual:
  - Accrual accounting allows accrual of interest income on NPLs, recording income in the period earned rather than in the period of cash flow.
  - Potential distortions from interest accrual on NPLs:
    - Interest income is recorded even though the borrower does not repay, distorting interest income and associated metrics (e.g., net interest margin).
    - NPLs increase from the accrual because unpaid interest is capitalized as part of the loan balance; for large, seriously delinquent NPL levels, the accrual can be substantial.
    - Provision coverage loses meaning because matching provision to the interest accrual makes adequacy of general loan loss provisions difficult to judge, potentially delaying recognition of loan deterioration.
- Remedial measures recommended:
  - Improving transparency:
    - Require banks to disclose separately (i) the increase in NPLs due to loan deterioration and that which is from accrual of interest income; (ii) the allocation of provisions by the amount dedicated to original loan principal and that for interest accrual.
  - Adopting a sound non-accrual principle:
    - Interest accrual should be suspended after a certain period of time (consistent with an appropriate definition of an NPL, e.g., an impairment trigger or days past due – 90 or 180 days).
  - Charge-off/write down of uncollectible portions of NPLs:
    - Require prompt charge off/write down of uncollectible credits (both accrued interest and principal).
    - Make such a process rules-based using passage of time from when payments are owed and unpaid (e.g., 180 or 365 days past due).
    - Legal framework must ensure the bank retains judicial title and can collect on the loan—including through loan sales—after charge-off.

---

### VIII. THE REGULATORY TREATMENT OF NPLS IN THE UNITED STATES — Early loss recognition
- Key distinction:
  - There are significant differences in recognizing loan losses through provisions between IFRS (as applied in Europe) and GAAP (as practiced in the United States).
  - Both apply the incurred loss approach, but a regulatory requirement overlays GAAP in the United States that limits managerial discretion.
  - This regulatory overlay results in a more conservative U.S. GAAP/regulatory treatment of NPLs for banks compared with IFRS application.

*Source: _sdn1519tbn - 1. PUBLIC REGISTERS (Technical Background Notes), INTERNATIONAL MONETARY FUND*

### 2.      There are two key regulatory requirements that are imposed in the United States.

### There are two key regulatory requirements that are imposed in the United States.

### Regulatory requirements for NPL accounting
- Banks must (i) suspend and reverse interest income on NPLs once the loan is 90 days past due on any payment or is deemed uncollectible in whole or in part (i.e., the non-accrual principle); (6)
- Banks must (ii) promptly charge off/write down the loan balance on the bank’s accounting statements to the recoverable collateral value after six months.

### Charge-off mechanics and collateral valuation
- For a charge-off, any loan balance that exceeds the recoverable value (less the cost to sell) should be charged against the loan loss reserve.
- In determining the collateral value, it should be today’s “spot price” with no adjustment for forecasted increase in collateral values.
- The act of charging-off the loan should not be confused with the forgiveness of the borrower’s debt.
- The bank must still be judged on its ability to collect defaulted loans, including through loan sales.

### Nonaccrual to accrual transition and loan modifications
- A nonaccrual loan may be returned to accrual status after the borrower has made a series of contractual payments.
- Improvement in the borrower’s condition may arise from a modification of lending terms.
- Modification practices are subject to close regulatory scrutiny due to the concern that liberal modification leads to misstatement of loan portfolio condition.
- There must be sound internal control processes governing any modification, and management information systems must monitor and verify that the modifications are working.

### Effects on credit cycle, price discovery, and tax treatment
- The effect of this treatment is that banks will recognize credit losses sooner in a weakening credit cycle, aiding earlier recovery or failure if capital is insufficient.
- System NPLs peaked at 5 percent of loans in 2009, and have since declined to less than 2 percent.
- The charge-off requirement removes the disincentives to bank sales of NPLs, contributing to earlier price discovery for NPLs and underlying collateral.
- Tax incentives encourage early write offs since provisioned loan losses are not tax deductible.

### Arrears management: strategy and organization
- Banks need to embark on a comprehensive process to manage NPLs; during normal times arrears management is a small, often ad-hoc activity.
- A growing number of NPLs requires establishing policies, operational processes, skills and staffing to ensure swift workout and to prevent further deterioration.

Key elements:
- Segmentation:
  - Exposures can be segmented along common criteria, such (i) size and “vintage” of arrears, (ii) the type of exposure (e.g., mortgage vs. consumer loan) and the kind of counterparty (private individual, SME vs. corporate), and (iii) the risk inherent to a distressed loan.
  - Segmentation helps prioritize arrears management activities given balance sheet impact and constrained operational resources.
- Restructuring policies:
  - Restructuring policies need to foster sustainable, long-term solutions.
  - Forbearance measures (e.g., grace or interest-only periods) can mitigate temporary cash shortages but are not effective for protracted reductions in debt servicing capacity.
  - For each lending segment, develop “strategy templates” aimed at restoring long-term viability or liquidating the exposure, including standardized methodologies to assess current and future financial situation of a delinquent borrower.
- Organization and processes:
  - Standardize and industrialize arrears management in lending segments with high case volumes.
  - Set up specialized call centers as first point of contact, teams specialized by lending segment and process step (early arrears, late arrears, restructuring, recovery), and teams for high-value/high-complexity cases.
  - Consider on-boarding external expertise and carefully supervised outsourcing to supplement operational capacity.
- Technology:
  - Augment usual IT systems with specialized functionality to manage large NPL portfolios and maximize automation.
  - Implement tools for monitoring borrower performance, automating assessment of borrower financial situation and adequacy of loan modifications at single-loan and portfolio level, and workflow management tools to track large numbers of cases while minimizing paperwork.

*Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/ft/sdn/2015/_sdn1519tbn.pdf*

### 11.      The arrears management performance needs to be continuously monitored to identify

### 11.      The arrears management performance needs to be continuously monitored to identify

### Arrears management: monitoring and indicators
- Balance sheet indicators move too slowly to be effective for arrears management.
- Operational indicators are needed for immediate feedback, for example:
  - numbers of cases agreed with the borrower
- Financial indicators are needed for immediate feedback, for example:
  - cash collections
- These indicators should:
  - allow monitoring of performance at all levels of the organizational hierarchy
  - be used to define forward-looking targets consistent with the bank’s capital planning and provisioning framework

### Key recent reforms to corporate insolvency law (selected European countries)
- BULGARIA
  - 2013 amendments limit the backdating of insolvencies and clarify set off and avoidance rules.
  - A trustee or any creditor (in case of failure of the trustee) can bring avoidance actions and claim repayment of annulled transactions within 1 year as of opening of the start of the bankruptcy proceedings.
- CROATIA
  - 2012 law introduced pre-insolvency settlement proceedings.
  - Restructuring plans approved by a judge may include write-off of parts of creditors’ claims, debt-to-equity swaps, extension of repayment period, decrease of interest rates, changes in security instruments, corporate restructuring, and introduction of strategic partners.
- CYPRUS
  - Voluntary out-of-court mediation under the financial Ombudsman.
  - 2015 Companies Act amendments redefined commencement criteria including “inability to pay”, shortened winding-up, and introduced examinership with an initial four months protection period and a court-appointed examiner preparing a debt settlement/restructuring proposal.
- FRANCE
  - 2012 amendments expanded protective measures and eased debt restructuring through subordination agreements and eligibility for accelerated financial safeguards.
  - 2014 amendment updated insolvency proceedings:
    - Pre-insolvency proceedings: enhanced obligation to inform statutory auditor and employee works councils; enables pre-packed sales; amends grace periods to extend maturities to up to 2 years; grants priority to fresh money to all providers if the plan is approved; voids contractual provisions that restrict debtor rights; designates an implementation official.
    - New accelerated safeguards proceeding (procedure de sauvegarde acceleree) created to encompass all creditors; plan must be approved by creditors in value in a conciliation procedure and then by the court within 3 months.
    - Ordinary safeguard proceedings (procedure de sauvegarde) revised to allow creditors to propose alternative plans, call shareholders to pay unpaid capital, convert safeguard into reorganization if plan not adopted, oblige creditors’ committees to disclose some information, and grant administrators power to convene shareholder meetings.
    - Reorganization procedure (procedure de redressement judiciaire): judicial representative may be appointed to restore shareholders’ equity; administrator may request partial or total transfer of the business; payments under executory contracts are no longer permissible except in reorganization procedures.
  - 2015 law introduced targeted modifications: specialized commercial courts for insolvency cases; improved qualifications/regime for insolvency administrators; measures facilitating debt restructuring based on capital modifications including capital increases/reductions and compulsory transfer of shares.
- GERMANY
  - Protective shield proceedings (introduced 2012) available to debtors in imminent insolvency who qualify for debtor-in-possession status.
  - Process involves a maximum three months interim stage to prepare a pre-packaged restructuring plan under a mediator (“Sachwalter”) and a creditors’ committee; judge may permit creation of administrative claims (e.g., fresh money borrowing); feasible prepackaged plan can be voted and confirmed in subsequent formal insolvency proceeding with general provisions for voting, cram-down, and minority protection (guarantee of liquidation value).
- GREECE
  - 2014 temporary law provides three mechanisms:
    - debtor-initiated out-of-court mechanism for small SMEs and professionals with tax benefit for banks dependent on debt write-off; public creditors’ claims settled in accordance with installment schemes
    - debtor-initiated simplified pre-pack for large debtors requiring a 50.1% majority of creditors to approve the plan subject to court approval; public creditors’ claims tied to restructurings under an installment scheme
    - creditor-initiated special administration enabling sale of all assets or business by creditors subject to court supervision
  - 2015 amendment simplified and strengthened rehabilitation processes, strengthened post-commencement financing, removed procedural obstacles, and streamlined rehabilitation processes.
- HUNGARY
  - 2010 Hungarian Banking Association out-of-court guidelines for companies in financial distress.
  - 2012 amendments:
    - judicial mediation can be initiated by mutual agreement with court supervision and approval
    - composition agreements not binding on creditors failing to register claims within 30-day deadline; creditors cannot enforce claims unless third party initiates liquidation and claim is not time-barred
    - special rules for bankruptcy/liquidation of companies declared exceptionally significant by the government
- ITALY
  - Reforms between 2009 and 2015; major reform under study.
  - Techniques allowing debt restructuring without full insolvency:
    - Restructuring agreements: need court approval and approval by creditors representing at least 60% of claims; expert gives feasibility opinion; binds approving creditors; dissenting creditors need full payment.
    - Rescue plans: protect actions undertaken in rescue plan against claw-back in successive insolvency.
    - Restructuring agreements with financial institutions: 2015 reform allows agreements when a company has more than 50% of outstanding debts with financial institutions; if 75% majority is reached, remaining financial creditors bound; non-financial creditors must be paid in full.
  - Formal procedures include liquidation and reorganization; 2015 reform facilitates bids by third parties and enables creditors holding 10% of claims to file a composition proposal if company’s proposal provides a repayment rate to unsecured claims lower than 40%.
  - Emphasis on post-petition/bridge financing priority and protection against claw-back.
- LATVIA
  - 2009 out-of-court restructuring guidelines adopted in line with the INSOL Principles.
  - 2010 Legal protection proceedings (LLP) enable rehabilitation with expedited court approval of rehabilitation plans; plan length two years with possible extension for another two years by two-thirds of secured creditors and a simple majority of unsecured creditors; plan may include debt-for-equity swaps or debt forgiveness; commencement triggers a stay on enforcement actions.
  - 2015 amendments: management board must file for insolvency if debts unsettled for more than 2 months; creditors can join administrator claims with third party rights; creditor with claim rights against a third party secured by a pledge over debtor’s property considered secured; substantiation of creditors’ claims by court decision in simplified procedures; insolvency administrators considered public officers.
- LITHUANIA
  - 2012 law provides for restructuring of companies in financial difficulty including plan guidelines, liabilities and discharge, appointment of restructuring administrator, management of company and assets, conditions for approval, duration, simplified procedure, termination and closure.
- POLAND
  - 2015 law reforms corporate insolvency regime: refines bankruptcy tests (illiquidity and balance sheet), enables pre-packs, streamlines bankruptcy, improves protection against fraudulent conveyances, changes priority for distribution of proceeds, provides rules for certain contracts, sale of securities with re-purchase and derivative agreements, right to cherry-pick, inoperability of contractual provisions restricting disposal of assets after petition.
  - Class voting permitted; cram down allowed.
  - Four restructuring procedures introduced:
    - Arrangement Approval Proceedings: debtor-in-possession, available if disputed claims represent ≤ 15% of the claims; no stay on enforcement; debtor collects creditors’ votes in writing.
    - Accelerated Arrangement Proceedings: available if disputed claims represent ≤ 15% of the claims; debtor in possession under supervisor; stay on execution granted; voting at creditors’ meeting.
    - Arrangement Proceedings: available if disputed claims represent +15% of the claims; debtor benefits from a stay; court supervised; court may appoint an administrator; voting at creditors’ meeting.
    - Remedial Proceedings: provide for a stay of executions; cherry-picking rights permissible; administrator takes over management (not debtor-in-possession); voting at creditors’ meeting.
- PORTUGAL
  - 2011 Guidelines for Extrajudicial Recovery provide guidance aligned with INSOL Principles.
  - Special Recovery Procedure (PER) introduced 2012 as a fast track in-court mechanism: pre-insolvency procedures with stay on enforcement, cram down of dissenting creditors, enhanced priority financing; 2012 amendment removed mandatory creditors’ meetings and shortened procedures.
  - 2015 PER amendment lowered majority requirements to approve plan, enhanced priority of new money to debtor, and ended enforcement actions for debtor’s guarantors.
  - 2012 System for the Recovery of Undertakings (SIREVE) facilitates out-of-court restructuring for SMEs through mediation; tax and social security administrations required to participate but may opt out; 2015 amendment improved viability diagnosis.
- ROMANIA
  - 2010 Corporate Debt Restructuring Guidelines aligned with INSOL Principles.
  - 2014 insolvency law overhauled regime: consolidated matters and introduced ad hoc mandate proceedings (confidential pre-insolvency debtor-in-possession) and concordat preventive (debtor-initiated debtor-in-possession with temporary stay and majority creditor voting), and unified judicial reorganization and bankruptcy.
  - New features: (i) observation period limited to 12 months, (ii) coordinating procedures for group companies, (iii) possibility of interim measures to safeguard assets, (iv) ‘private sector test’ encouraging public creditors to negotiate like private creditors and informing tax authorities of initiation, (v) strengthened protection of post-commencement financing.
- SERBIA
  - 2010 new corporate insolvency law introduced fast track reorganizations.
  - 2014 amendments increased procedural transparency, tightened supervision and licensing of insolvency administrators, limited rights of related parties, and provided UNICITRAL-based cross-border insolvency rules.
  - 2011 law on Consensual Financial Restructurings based on INSOL Principles with Serbian Chamber of Commerce and Industry as institutional mediator for voluntary restructuring for corporate debtors with two or more bank creditors.
- SLOVENIA
  - 2012 out-of-court non-binding guidelines along INSOL Principles.
  - 2013 insolvency law amendments introduced pre-insolvency restructuring for large and medium firms with stay on creditor actions and majority voting; changes to reorganization procedures include:
    - increased control by financial creditors including initiation rights, plan precedence, and management control in certain cases
    - absolute priority rule eliminating debtor equity if value of equity is zero
    - corporate restructuring features like debt/equity swaps and spin-offs
    - inclusion of secured creditors in compulsory settlement and ability to pool collateral under a settlement plan
    - write-down of collateral to market value with conversion of unsecured portions into unsecured claims permitted
    - recognition that creditor majorities can agree to reduce principal on unsecured debt and extend maturities/reduce interest rates for secured and unsecured debt
  - 2013 amendments also introduced simplified compulsory settlement for micro and small enterprises.
- SPAIN
  - 2013 law created OCAP (“acuerdo extrajudicial de pagos”) out-of-court procedure for small businesses with professional mediator; stay on executions up to 3 months max; public creditors not affected. 2015 amendment extended availability to consumers.
  - 2014 decree (codified into law) changes:
    - Individual schemes of arrangement: allows pre-insolvency agreement with creditors not subject to avoidance action.
    - Collective refinancing agreements: strengthened protection against avoidance actions; expanded scope to include debt write offs and debt-to-equity swaps; refinancing agreements with judicial approval can be imposed on dissenting creditors upon requisite majorities; secured creditors can be included subject to higher majorities; all new money given priority for a period of two years from entry into force.
    - Allows stay of execution during pre-insolvency period subject to limitations; public creditors not included in the stay.
  - 2014 and 2015 amendments:
    - In-court proceeding: eliminated previous plan content limits (previously up to 50% write-down of unsecured debt and reschedulings up to 5 years). Now no limit to write downs and reschedulings can be up to 10 years. New class voting system divides creditors into four classes (labor, public, financial, other) further subdivided by privilege; majority of 50% or 65% of ordinary creditors required to approve the plan.
    - OCAP Procedure: content extended beyond prior limitations (25% write-down and three year moratorium); secured creditors may be bound; majority thresholds amended; streamlined through Commercial Registry, notaries and chambers of commerce with pre-designed forms/templates and improved mediators; consumers eligible.

### Key recent reforms to personal insolvency law (selected European countries)
- CYPRUS
  - 2015 Bankruptcy Law amendment introduced Personal Repayment Schemes for natural persons with stable income to restructure secured and unsecured debt and possibly keep primary residence; schemes approved by required majorities of creditors become binding on all creditors upon court confirmation; court-imposed schemes possible if creditors receive no less than liquidation outcome.
  - Protective order stays creditor action for an initial period of 95 days while debtor prepares a repayment scheme with insolvency practitioners.
  - Debt Relief Orders allow discharge of up to 25,000 EUR of unsecured debts without creditor consent for persons with virtually no income or assets.
  - Discharge period is 3 years.
- ESTONIA
  - 2010 law established judicial restructuring procedure for individuals; plan must be approved by majority of creditors and the court; secured creditors can realize rights in rem separately.
  - Debtor may petition for a stay of all enforcement actions.
  - Discharge/payment period is 3-5 years.
- GREECE
  - 2010 law (amended 2012 and 2015) introduced voluntary mediation, repayment plan (creditor-approved), and judicial settlement; 2015 amendments streamlined process, clarified minimum living expenses, and included public creditors’ claims as dischargeable debt.
  - Debtor may petition for a stay of all enforcement actions.
  - Discharge period is 3-5 years.
- HUNGARY
  - 2015 law establishes personal insolvency regime: mandatory out-of-court debt settlement (must be approved by all creditors), in-court debt settlement mediated by a family administrator (approved by simple majority of creditors and the court), and judicial debt settlement enabling court-imposed agreement.
  - Debtor may petition for a stay of all enforcement actions.
  - Discharge period is 5 years.
- IRELAND
  - 2012 Personal Insolvency Act introduced:
    - Debt Settlement Arrangement (requires 65% creditor approval in value) settling unsecured debt over 5 years.
    - Personal Insolvency Arrangement for cash-flow insolvent debtors to settle secured debt up to €3 million (more if agreed) and unsecured debt over 6-7 years; approved by 65% of all creditors and more than 50% of secured creditors and 50% of unsecured creditors.
  - 2015 introduced judicial review of creditor-rejected Personal Insolvency Arrangement which may overwrite creditors’ objections.
  - Court may grant protective certificate for 70 days (extendible).
  - Debt Relief Notice allows discharge after 3 years of unsecured debt up to €20,000 (raised to €35,000 in 2015) for persons with essentially no income or assets.
  - Discharge period is 3 years.
- ITALY (personal insolvency)
  - 2012 law established personal over-indebtedness framework; restructuring proposal needs court approval if accepted by creditors representing 70% of debt value.
  - Court imposes moratorium of 120 days on creditor enforcement; restructuring proposal may request moratorium on payments up to one year if conditions met.
  - Discharge may be granted at end of liquidation procedure under certain circumstances.
- LATVIA (personal insolvency)
  - 2010 law introduced repayment plan monitored by court with bankruptcy proceedings and liquidation of nonexempt assets followed by court-approved repayment plan.
  - Commencement of personal insolvency proceedings stays collection and enforcement actions.
  - Discharge period is between 1 to 3.5 years.
- LITHUANIA (personal insolvency)
  - 2013 law establishes procedure for natural persons to file a restructuring plan approved by creditors and sanctioned by the court and implemented by an administrator.
  - Fast track option where plan and bankruptcy petition filed together and court decides which to proceed with.
  - General stay applies to claims by all creditors during proceedings.
  - Discharge period is 5 years.
- POLAND (personal insolvency)
  - 2009 law permits individuals to file for personal bankruptcy focusing on liquidation rather than restructuring.
  - Law provides for stay on creditor action against claims dealt with in bankruptcy proceedings.
  - Debtor may request a discharge after 5 years.
- ROMANIA (personal insolvency)
  - 2015 personal insolvency law introduced debt repayment plan and asset liquidation procedures; established regional and central administrative committees to screen cases before court adjudication.
  - Law provides for a stay and a simplified procedure for debtors who lost 50% of work capacity or are eligible for retirement.
  - Discharge period is 3-5 years dependent on the pay-out dividend.
- SPAIN (personal insolvency)
  - 2015 introduced system for individuals consisting of two mandatory consecutive stages: out-of-court OCAP procedure and, if unsuccessful, in-court bankruptcy liquidation.
  - After liquidation, debtor may apply for an immediate yet provisional discharge affecting all outstanding unsecured and subordinated claims except public claims and alimonies, and the unpaid part of secured claims following collateral execution.
  - Non-discharged claims (except public claims) subject to payment plan up to five years; final discharge generally granted upon compliance but may be revoked for up to five years if fraud discovered.
  - Stay on executions up to 3 months max.
  - Discharge: immediate provisional discharge with payment plan up to 5 years; final discharge generally granted upon compliance but can be revoked up to five years after provisional discharge for fraud.

*TECHNICAL BACKGROUND NOTES — INTERNATIONAL MONETARY FUND.*

### 1.      In general, the participation of all creditors, including public creditors (such as tax and

### Participation of Public Creditors and Corporate Law Obstacles to Reorganization

### Participation of public creditors in corporate debt restructuring — key findings
- In general, the participation of all creditors, including public creditors (such as tax and social security authorities) makes corporate debt restructuring more effective.
- Treatment of public creditors’ claims varies: from granting super-priorities in some countries to detailed guidance allowing participation in out-of-court restructurings, to outright prohibition of participation in other countries.
- International guidance is not definitive, but several general principles are highlighted:
  - UNCITRAL Legislative Guide on Insolvency Law (Recommendations 187 and 188) recommends that priorities be “minimized”, especially, “priorities over secured claims.”
  - World Bank’s Principles for Effective Insolvency and Creditor Rights Systems (2005) state that “public interests generally should not be given precedence over private rights (Principle 12A).”
  - IMF’s Orderly and Effective Insolvency Procedures notes the tax privilege rationale: giving government priority with respect to tax claims can incentivize tax authorities to delay collection and thus benefit rehabilitation (IMF, 1999, p. 49).

### Policy recommendations on ranking, restructuring, and guidance
- Ranking
  - Super-priorities (i.e., ranking ahead of secured creditors) may negatively affect secured credit and should be avoided.
  - Specific recommended limits:
    - (i) priorities (e.g., ahead of unsecured creditors) should be limited to the tax claims within a specified period of time (e.g., last 12 or 24 months);
    - (ii) interest and penalties should be treated as unsecured (or be subordinated) claim, with only principal enjoying preferential treatment;
    - (iii) VAT and employee withholding taxes may be ranked preferentially (e.g., ahead of unsecured creditors).
- Restructuring
  - Subject to clear and predictable criteria, public claims (including principal) would ideally be restructured like any private claim.
  - Consider whether and how restructuring of public claims can be effected within constitutional and legal frameworks where an explicit legal basis is required for the tax administration to engage in debt restructuring.
  - Enhance information sharing between private and public creditors, for instance through a credit register.
- Guidance
  - Provide clear and predictable guidance on how and under what conditions tax officials can participate in debt restructuring and insolvency; facilitate good faith application and shield tax officials from personal liability, subject to safeguards against fraud.
  - Establish task forces of specialists (within the tax administration) to deal with distressed businesses with tax liabilities.
  - If guidelines are not advisable due to inexperience or lack of capacity of the tax administration, consider a certain degree of automaticity in debt restructuring.

*Prepared by Wolfgang Bergthaler and Jose M. Garrido (both LEG).*

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### Corporate law obstacles to reorganization — key findings
- The conflicts between insolvency law and company law extend to a wide range of issues; national company laws in EU Member States reflect EU Directive principles, notably:
  - (i) the competence of the shareholders’ meeting to take decisions regarding any changes to the capital; and
  - (ii) the right for shareholders to acquire new shares issued by the company (i.e., pre-emption rights).
- Insolvency requires reconsidering the normal functioning of company law rules because shareholders’ status as residual claimants gives way to creditors’ claims when a company is insolvent.
- Preservation of shareholder rights can hinder effective restructuring:
  - If shareholders preserve decision power over capital alterations or pre-emption rights, it may be impossible to implement a reorganization plan based on a debt/equity swap, or on a successive decrease and increase of capital.
  - This can lead to creditors making concessions to shareholders that are not justified on economic grounds.

### Comparative legal reforms and examples
- There is room to adjust national company laws consistent with EU Directives to support effective reorganization; examples include:
  - Germany’s 2012 reform of the insolvency law allows reorganization plans to include debt/equity swaps that wipe out existing shareholders, provided that:
    - (i) shareholders are not worse off under the reorganization plan than in liquidation of the company; and
    - (ii) the reorganization plan is approved with the majorities and complies with procedures required by the insolvency law.
  - Slovenia’s 2013 insolvency law amendment permits debt/equity swaps without the consent of existing shareholders.
  - The 2015 reforms to the Italian and French insolvency regimes permit debt/equity swaps without the consent of existing shareholders.

### Rationale for capital-structure modifications
- Capital modifications such as debt/equity swaps:
  - Allow companies to reduce their debt.
  - Afford creditors the opportunity to take an interest in the reorganized company, with the possibility of receiving future profits or disposing of their shares in the market.

*Prepared by Wolfgang Bergthaler and Jose M. Garrido (both LEG).*

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### Selected comparative data points from AMC initiatives (excerpted examples)
- Europe Securum, Dec. 1992 (Sweden)
  - Public 100%; SEK24bn; 10-15 years
  - SEK67 gross (at set-up)
  - 33% equity and govt. funding
  - Transfer: At net book value; No profit sharing
- NAMA, Dec. 2009 (Ireland)
  - €100mn; 51% private, 49% public; 10 years
  - €74 gross; €32 net
  - 0.3% equity, 5% sub bond, 95% senior, govt guaranteed, bought by banks
  - Transfer: Avg. 57% discount to nominal value; valued at long term economic value
- SAREB, Dec. 2012 (Spain)
  - €1.2bn; 55% private, 45% public ; 15 years
  - €108 gross; €51 net
  - 2.2% equity, 6.5% (€3.6) sub, 91.4% (€50.8) senior, mainly govt guaranteed
  - Transfer: Discount by asset category from 32.4% to 79.5%; Avg. 53%; no profit sharing
- BAMC, Feb. 2013 (Slovenia)
  - €204mn; 10 years
  - €4.5 gross; €1.5 net
  - 17% equity, 83% (€1.0) senior govt. guaranteed
  - Transfer: Avg. discount of 65%; valued at “Real long term value”; no profit sharing
- SNB StabFund, Nov. 2008 (Switzerland)
  - $5.5bn repurchase option paid in as equity by UBS
  - $39.4 gross; $38.7 net
  - 14% equity, plus Funding lines SNB 90%, UBS 10%
  - Transfer: 2% below book value; First $1bn profit to SNB, 50%-50% split thereafter

*Sources: Bloomberg L.P., Consensus Economics, European Commission Annual Macro-Economic Database, U.S. Federal Reserve, Haver, IMF (FSI, GFSR, WEO), company information, and broker reports.*

*Italic: Extracted from the IMF Technical Background Notes prepared by Wolfgang Bergthaler and Jose M. Garrido (both LEG).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/ft/sdn/2015/_sdn1519tbn.pdf_