Today, the Bank of Italy released two Notes on Financial Stability and Supervision (Notes No. 6 and 7).
Note No. 6 – ‘Why exceptional NPL sales should not affect the estimated LGD of A-IRB banks’, has three main purposes: (a) to assess the impact of massive NPL sales on loss given default (LGD) estimates; (b) to show that, for macroprudential purposes, it is undesirable and unwarranted to let losses from exceptional sales affect LGD estimates; (c) to propose feasible solutions on how to sterilize, or at least mitigate, the effect of NPL sales on the LGD to avoid any possible disincentives to NPL sales.
Note No. 7 – ‘Bad loan recovery rates’, seeks to fill the information gap from the scarcity of reliable public data on banks’ track record in bad loan recovery rates. Such scarcity generates market uncertainty and tends to have a negative effect on the valuation of this category of debt. By using data from the Central Credit Register (CCR), this Note shows that the recovery rates of the Italian banking system are on average consistent with the coverage ratios reported in banks’ balance sheets and that recoveries for positions closed following standard work-out procedures are significantly higher than those recorded for positions sold. The data also show that the recovery rates vary significantly among banks, confirming that banks must resolutely implement the measures already under way to make the management and recovery of non-performing loans (NPLs) more efficient.