 Good morning, everyone. I have to say I'm John Fell, I'm Deputy Director General of the Finance and Disability Department at the ECB. I've been asked to step into the chair for Stefan Inglis and I have to say it's quite a challenge to fill the shoes of Stefan in steering a discussion on MPLs, but I am honoured that he agreed that I step in for him in this panel. By the way, I'm told that Stefan is making a very good recovery from the flu. So now, before inviting the panelists to speak, I would like to make some remarks on the work that is currently underway in Europe to tackle the almost 1 trillion euro stock of MPLs that is currently sitting on European balance sheets. And it's fair to say that there is a lot of work going on. The SSM, as you know, issued guidance to banks on MPLs in March and this is now being followed up actively with the banks. The EU Financial Services Committee issued a report on MPLs in May and the ESRB published a report in July of an expert group on MPLs that I had the privilege to co-chair with Piers Haven of the EBA and also with the benefit of Stefan Ingbe's wisdom and guidance as chair of the advisory technical committee of the ESRB. Now, apart from all of these official reports, a number of policy papers have also been published recently by European institutions, including by ourselves at ECB. So there are plenty of ideas circulating around about how to tackle the problem of MPLs. It's now expected that all of this work would be brought together into a concentrated effort over the coming year in view of the agreement that was reached in July of an EU Council action plan to tackle non-performing loans. Now, the perspective that we in the macro-prudential policy and financial stability area of the ECB have tried to bring to the European debate on MPLs is a macro-prudential one. And this perspective recognizes when resolution of MPLs is too slow, it can lead to a host of externalities, including banking sector fragilities that manifest in low profitability, elevating funding costs, and in a higher cost of capital. It can also lead to contagion and a kind of contagion that not all financial market participants accept those working in MPLs fully understand. A contagion through a weakening of the payment culture, which contaminates the performing book. And it usually also implies a misallocation of scarce financial resources as funding and capital are tied up with unprofitable firms, while credit availability to productive ones is constrained. On the other hand, though, a resolution strategy that is too hasty involving the seizing and liquidation of collateral can also have adverse macro-financial impacts, including the risks of fire sales and even the possibility that viable firms are liquidated in the process. Ultimately, this too may have adverse implications for economic activity and also for financial stability. So a balancing of these externalities essentially requires getting the pace of resolution right so that the maximum value can be extracted from non-performing loans without imposing strains on the financial system. Maximizing the NPV on MPLs, however, also depends, among other things, on the efficiency of the financial markets. Now, when the price mechanism leads to an inefficient allocation of goods and services, microeconomic theory teaches us that there is probably a market failure at work. One indication of market failure in the European MPL market is the very large bid-ask spreads between the prices that investors are prepared to pay for MPLs and the price that banks are prepared to sell them for. A typical gap of 10 to 20% is often cited, although it's not unusual to hear much larger figures in that. Another indicator of market failure is that most of the trading activity is in unsecured MPLs, often at very low prices, while liquidity in the market for higher quality MPLs is lower. Now, the fact that investors use higher discount rates than banks do for valuing MPLs, it does have sound economic reasoning. For instance, MPL investors usually have a higher cost of capital than banks. They also have different contractual positions than banks do because of the timing of their entry into the contract. So, for instance, their discount rates will reflect the weakened credit worthiness of borrowers, whereas banks value the exposure at the originally contracted interest rate. However, after a count is taken of all of those factors, our analysis suggests that the bid as spread is too wide. Now, identifying the market failures that explain that bid as spread is crucial for identifying the appropriate policy response. Three sources of market failure are normally distinguished in microeconomics textbooks, market failures arising from exchange costs, market failures arising from market structure, and market failures arising from the nature of the commodity itself. Now, our research at ECB and also our dialogue with market participants has led us to the conclusion that for the MPL market, market failures actually arise in all of these three areas, with all of them working in the direction of widening the bid as spread. First, concerning exchange costs, and I think this is the one that is best known, investors face asymmetric information challenges relative to better informed banks. In a special feature that we published in our Financial Stability Review last November, we characterised this in the framework of Accorlof's Market for Lemons Conundrum, whereby investors demand a premium, reasonably so to protect themselves from the uncertainty that better informed banks will try to sell them assets which have inferior credit quality than that that is being betrayed. Second, maybe a little bit more controversially concerning the structure of the MPL market itself, our market intelligence has revealed that a handful of MPL investors control the bulk of the trading activity. In microeconomics, such a market structure which arguably results from barriers to entry and there are plenty of explanations for it, is labelled as an oligopsony, a situation where there is a concentration of market power among a limited number of buyers, which then pushes traded prices lower. And then third, concerning the nature of the commodity itself, MPLs are subject to so-called imperfect excludability. So, say for example that a bank has an impaired loan with a corporate or a commercial property developer, the likelihood is that the debtor has multiple creditors where some of the loans may be performing and some of them may not be performing. Now, a buyer of an impaired loan will often not have exclusive access to the resources of the debtor and so instead may have to compete with other creditors. Since this lack of coordination imposes costs on and creates risks for MPL investors, this too will push traded prices lower and of course this was an important element of the NAMA strategy when it absorbed loans in Ireland. Now, turning to the policy response, an important policy message from a speech that Vice President Constancio gave at the Broigle think tank in February was that the extent of market failures and frictions can differ depending on the market and also on the asset class, which is why we at the ECB think it is unlikely that any single instrument will provide a magic bullet solution for Europe's MPL problems. This is the rationale for advocating what we have been calling a comprehensive solution for tackling the European MPL problem, deploying a range of policy instruments in a way where they are likely to be most effective. So between the well-known extremes of internal work out and direct sales, there's a range of options for tackling MPLs and that includes, for instance, securitisation, the establishment of asset management companies and also the establishment of so-called MPL transaction platforms. Now, if effectively combined, we think together they could address these market failures that I mentioned. So on securitisation, we published a proposal in the May issue of our financial stability review, which utilises Akerlof's policy prescription for the lemons problem. Not exactly in the way that Akerlof prescribed it, but kind of. It's the issuance of guarantees, but the guarantees in this case will be guarantees provided by the state on the junior tranches in MPL securitisation to provide comfort to investors on asset quality. Now, while securitisation may address the asymmetric information and also possibly the oligopsony market failures because it probably would attract more investors, a shortcoming of the approach we think is that it is not clear if it can resolve the imperfect excludability problem that I mentioned. That, however, can be addressed with what we call systemic AMCs, asset management companies which have a major role to play. It's often under-stated the role that AMCs play in solving coordination problems when many banks are trying to tackle their MPL problems at the same time, just as Nama did in Ireland and Sara did in Spain. Now, however, given state involvement in systemic AMCs, and I mean here the provision of finance and capital, we're of the view that the asset perimeter in AMCs should be confined to asset classes where the risks of political interference are minimised. For instance, to commercial real estate loans or perhaps corporate loans. Now, from a financial stability perspective, a narrow asset perimeter also makes sense to avoid an outside risky AMC from being established, which may risk setting off a negative sovereign feedback loop. So, although AMCs do offer the prospect of addressing all three of the market failures that I mentioned, there are limits to their use. Now, also in Vice President Constancio's broglet speech, he called for the preparation of a European blueprint for AMCs to be used at national level. And this proposal has since been taken up by the EU Council conclusions and the task has been assigned to the European Commission. And such a blueprint for national AMCs, as we see it, would essentially provide a how-to guide for setting up an AMC and moving away from the case-by-case approach that inevitably we saw in countries that applied for financial assistance programs during the crisis. While bringing together in a kind of a manual format a wide variety of information on, for instance, state aid rules and accepted framework for valuing assets, advice on governance and, importantly, advice on the asset perimeter. Now, third, a third option that we're examining closely and on which I already work at ECB also led, went into the conclusions of in the EU Council Action Plan, is the establishment of so-called NPL transactions platforms. Now, these can be thought of as the eBay for NPLs, where information is shared and where transactions can take place. And of course, such entities obviously can capture some of the benefits of AMCs and they can also address asymmetric information issues and also oligoptic issues, because there should be a broader investor base, at the same time avoiding risks of political interference. Similar to securitization, there may be issues around how to deal with the imperfect excludability, but we're thinking about now that at the moment and we will be coming out with something later in the year. Now, when markets fail, it's time for policy to act and our conclusion is that policy needs to support greater transparency in NPL markets, foster wider investor participation and help in addressing coordination issues. Now, while our proposals for deepening secondary markets have the potential in our view to reduce bid-ask spreads significantly, there are though limits to how far they can be narrowed if nothing is done to speed up insolvency procedures and reducing the cost of addressing NPLs. This is why our securitization proposal, for instance, advocates of financial structure where the state participates not only in providing, not only making itself available for the risk to the downside, but also participating in the upside, thereby creating a financial incentive to engage in much needed structural reform. So, with those few words, and that preamble, let me now introduce our panel who collectively have accumulated a wealth of experience with NPLs from different vantage points. First, we have Aris Tabulo-Dehwan, who is a consultant and an expert with 50 years of experience in banking. I'm told including 35 years in dealing with problem banks. Balian Romana Garcia is currently a non-executive director at Aviva and Insurance and Investment, an asset management company, and, but importantly, for our panel, she formerly served as president of Sarah. So, we have a unique vantage point on the AMC perspective. David Cera is the founder, chief executive officer and chief investment officer of the asset management firm Algebras, and he's, and his firm is an active investor in the European NPL market. And last, but by no means least, we also have Ed Sibley, who is deputy governor at the Center Bank of Ireland, and as a member of the supervisory board of the single supervisory mechanism, he has considerable experience with NPL issues. The speaking order have agreed with the panelists, it will follow the listing of names in the program, with each speaker having 10 minutes for their interventions, after which we will have a 20-minute discussion among the panel, and following that, conference participants will have a chance to pose questions to the panelists, but I am told that we need to close strictly at noon because we have the keynote speech. So, let me invite Aristibola de Poin to take the floor. Mr. Inves, while he was in office, asked me to briefly introduce myself. Don't be afraid, I'll be very brief. After having 12 years in commercial banking, I spent 40 years in dealing with problem banks, hands-on case-by-case. So, I did that work not only in Spain, but in four continents, and I think I ended up learning something. I was responsible for the Spanish First Insurance Deposit Guarantee, the Post Insurance Guarantee, the first bad bank, then responsible for banking supervision, then advisor to the World Bank on banking reform, and then my own consulting practice. As a result of that, my focus will be a macro, a micro approach, not a macro one. Of course, when I've seen 300 creatures, you become sort of a macro too. Also, I tend to be down to earth, even sometimes simplistic, but that's what I've lived. And also, I like to play the devil's advocate. So, I might sound like being out of the outer world here. Now, when I was announced the name of this session, I said, this is good news, a new effort to address the very important case of NPL. But I also thought it was bad news. Of course, after 10 years of crisis, the burden of NPLs are still there. And paradoxically, banks declare good regulatory capital. So, I'm there to say that something lives to be desired. Now, the background of my reflection, which contradicts the whole of my presentation, is that some have the impression that strong concern for stability is given priority over strict regulation and supervision. Some, I have some people speak about, we are facing beautiful normality. My answer is the present situation is not beautiful or normal. Why? Because for fear, regulators and supervisors, if this assumption was correct, which I don't put my hand on the Bible, for fear of the potential consequences of being strict, short term, on financial systems and on economies. It sounds like thinking we do want to improve things, we do want to improve things, but not yet. But we should be aware that our present stability paradoxically is unstable. Excess liquidity, Karl Marx used to say that religion was the opium of the people. I tend to say that excess liquidity is the opium of the banker. The banker tends to forget about risk. Now, what were the circumstances in 2007? There was excess liquidity. We now have excess liquidity. Bubbles, a real estate bubble. Now we have the debt and high yield securities. And now we have the threat of Mr. Trump with lowering the regulation standards, which no doubt would have contagion effects in Europe. So, a similar situation as 10 years ago. You can think of whatever you want. But other than that, we have an unresolved problem of non-performing loans and big geopolitical stability. We are at war in many geographical... So, I leave the reflection to you. Now, the should we really be afraid of the consequences? No. I think we should be strict instead and deal with the problems head on. Otherwise, the consequences are likely to be worse. A worse crisis may come about. And in my opinion, sooner than later. What does it mean sooner ? Two years, three years, four years. Now, just a few rules of thumb or reminders that are often disregarded by a number of supervisors. One problem is like those are my manias but based on my own white hair. Problem banks hide their knowledge. Do you know that? Are you familiar with that? But also systemic banks because they become so powerful that they overwhelm the supervisors. They are stronger than the supervisors. Second, if that is true and that is true. Regulation and supervision will not be effective not verification of procedures but verification of quantities estimation of losses. But this also applies to off-site analysts. Their findings are not reliable to me. Auditors work models and tests and AQR when they are based on non-inspected non-verified data. Otherwise, they are. Three, as a matter of fact the worst loans, this is one of my main manias the worst loans are never or seldom recorded as bad in the books or properly covered. They are never in arrears they are never impaired they go free. Four, cosmetics is mainly achieved by way of loan refinancing both principle and interest. I don't say that financing is a bad practice, I mean bad loan refinancing. That's a bad practice. Five, this is very important and it is not my own money, it's a fact. A truism. Non-performing loans do not perform. Non-performing loans but their supporting liabilities do convey a cost and a cash outflow. So they hurt the bank day after day. This is something not to be forgotten and I would say it's irrefutable it's difficult to accept but it's not difficult to understand. Six, borrowing does not fill the black hole. It has to be repaid as simple as that. Seven, a forward-looking approach and a strengthening of good governance is modern welcome a modern welcome but the supervisor should mainly focus on the present and on-site supervision should not be replaced by forward-looking approach. And last but not least who is to be blamed for the 10 years life of non-performing loans, the managers, the supervisors and regulators. Now, what's my suggestion? My suggestion does not exclude other mechanism of course. We have representative other mechanism on the table. But why NPL are not liquidated because they are not duly provisioned and liquidation would certainly unveil hidden losses and would also give dividends, bonuses, and management power and social predominance. So, let us be realistic and the key thing is record real asset value in the books. How by way of a thorough on-site case by case, on a thorough on-site case by case quantified inspections, not procedural inspection. Procedural inspection is also good but not quantifying inspections. The real value of asset is not good. This would require a turn of the screen. We were told yesterday that IFRS is making a great progress. I'm not so sure and in the question and answer period I could tell the reasons. I think there is need for IFRS 10. We had BAL1, BAL2, BAL3, BAL4, BAL7 who knows. It's cumbersome. It can be manipulated but capital increase you cannot do every day and it doesn't allow you to be how would I say increasing capital every year while provision as you identify the loss. So you stop the snowball from rolling. And in which areas dealing with expected losses case by case, on-site supervision practices case by case, evaluation principles, fixed assets should be valued at market, loans should be valued according to the repayment capacity of the borough and bad loans refinancing should be should be watched over very carefully. Provisions should be mandatory. Also there are three principles to be applied and current losses should be charged against P&L as provisions so that you identify gradually the problem and you can digest Mr. Garcia-Gatera said that the Spanish banks couldn't provision because they didn't make profits. If they had started five years ago they would have been able to and do not charge current losses on reserve for capital then stocks of losses belatedly unveiled should be charged on reserve or capital whatever the impact and capital should always be clean, not assigned to given expected losses welcome you should welcome the inflow of cash but don't consider that as regulatory capital. Since I am being told that it's my time as lieutenant I say that this may have a problem it may unveil the failure of some banks but other alternative formal options also may have to be financed by who, by whoever the creators, the billing the billing creators, the shareholders, the industry and the government who were in this year the most successful supervisors to solve the crisis those who acted promptly and injected government money perhaps, who knows recapitalization and resolution rules may have to be revisited and now I'll end up repeating General MacArthur's saying, he said that the failures of most defeats can be summarized in two words too late thank you very much thank you very much for those insightful remarks, so next up would be Berlin please thank you, thank you very much thanks for inviting me in the first place and for the sake of transparency I'm also member of the board of Santander it's not only Aviva I'll try to be quite brief I don't see my time there yeah but I have sort of three key messages I would say one is the first one being there's no silver bullet to solve NPL's problem the second one, this is not only about banks and I'll come back to that and the third one is technology exists and do you remember big data because I think that we should also talk about that so on the first point there's no silver bullet you know I'm quite familiar with the Spanish case so that's the basis of my reasoning but it's quite evident I think that this is a very complex issue so it needs a range of things, in our case we had increased provisions mandatory on NPL and on performing loans both we had an external valuation a third-party valuation we had disclosure and transparency rules on very specific pools of assets mainly the real estate related assets we also had a focus on refinance loans we strengthened the insolvency law and then we had our AMC so I think that brought Spain to a quite different position if you remember the graphs that we have just seen on where we are and if you remember where we were the chance has been swift but again there's a list of things maybe I'm biased no I'm biased but I think one of the key things was the AMC and if you compare the evolution of NPLs in the countries with recently successful AMCs being that Ireland and Spain compared to others like Italy you see that the evolution of performing loans has been quite different so that was my first message the second one is this is not only about banks it starts with banks but we have to take into a wide range of agents when dealing with NPLs starting with the process the process has a certain goal which is stabilize the financial system and clean up the bank's balance sheets but the goals of the other agents are quite different take the AMC the goal of the AMC is buy the assets as cheap as possible and manage them as efficiently as possible and then sell them at the highest possible price so the goals are quite different and back to your point on market failures I do think that the AMC addresses some or many of the market failures surrounding NPLs so on the AMC when do you have to get started that would be my first point I think when markets stop believing what the banks say about they're not performing loans that should be the starting point the second one is which loans one of the big problems with NPLs from my point of view it may be an evolving concept so you start with a performing loan and when does it become a non-performing loan and will it become a non-performing loan that would be the first problem in our case what we did was identify an asset class which is a real estate because we had a bubble but I think that that was key in the sense that we did not the AMC did not receive only non-performing loans it did receive all the loans surrounding a certain class of asset and debtors which addresses two of your points in terms of market failures because we did have a fairly good view of a debtor who had many positions with that company which of course helped us trying to deal with him and gave us some sort of bargaining power so it gives you two things one is bargaining power and the second thing is of course you can with your own balance sheet as an AMC you can balance out the positions that will be loss making with positions that will be loss making so I think that's something that from the point of view of the bank transferring or selling the assets is not the best point but back to this is not only about banks we should try to create AMCs that are standalone profitable and may survive on their own in the coming years not only when the whole thing starts the third point with AMCs is of course price so if you're looking around conflicts of interest you as an AMC you want to buy as cheap as possible as a bank you want to sell that as a highest possible price so I think that at that point you need either two things one a third party or bargaining power in both parts so the AMC should have also bargaining power and then there's the third point which is how and I think that's key actually never talk about that which is the operational side of it the problem that an AMC has is it does not have a platform and banking platforms are not sold you cannot buy a banking platform and you need it because you have to manage your assets which are by the way banking assets so in terms of operationally it is very I think delicate and key if it does not work then no matter what price you get it won't work there are different models you have the internal model in Germany the external in Spain and the mix in Ireland I won't get into that but I think that's something key it's not only about the assets it's how you will manage them the day after and then my final thing on the AMC is human resources it is a very specific animal knowing when you're going to die makes a huge difference it's quite difficult to attract people when they know that they will have a very well defined life within a company they won't be able to grow the company they won't be able to create new markets new services, new assets so that creates a very specific problem so that for the AMC and then we have the buyers and the markets as you said the NPL market in Europe is controlled by a very, very narrow number of agents and that has to do with I think a few things one is the problem with information and the problem with liquidity there are no good markets that give liquidity to loans to NPLs in fact what we could see in the Spanish case was it was easier to sell real estate assets than loans and that is because they are much more liquid you have a market they are easily priced you have buyers and sellers you do have a liquid market whereas in the case of NPLs you don't have liquid markets structured markets secondary markets it's difficult to value those assets not that many companies or institutions can buy assets in terms of loans how can they manage them how can they I think that creating a real market for NPLs and loans by the way would be key if we want to widen up this sort of activity and then servicers we don't talk about them but they are key you do need a servicing industry that is outside the banks you have that in the US for example in Spain we now have a servicing industry outside the banking world but I think that's another key point if you want to make this work in the ongoing process not when you start and when you create the AMC and when you clean up the bank that's fine but then you have to think onwards and that was my second message the third one is technology I think that will change materially how we deal with this because of a few things because of big data and predictive analytics the key point with NPL is when you want a price on NPL will the guy pay me back how can I know that and I think that the development of analytics and big data and predictability will help us understand much better who and how can a guy pay you back and that's key both for banks and for non-banks and creating a pool of data and a pool of instruments that help you decide who to address when you want to decide which debtors should you start with first is key so I will be compliant with the time and I'll just go back to my three messages which is there's no silver bullet there's no one thing you can do to solve whatever we pick it won't be the wrong one so we need a combination of things the second one this is not only about banks let's think about what happens afterwards not only how to make it work at the beginning I say that because I suffer this lack of understanding sometimes and that technology will change I think materially all this business and that was it, thank you thank you very much for those very insightful remarks ok Davide please thank you for inviting me so let me tell you my first experience in non-performing law I'm a graduate in a UK bank in the Italian treasury back then with Mario Draghi as head hires the bank for which I was working to value Banco di Sicilia which is a bank in 1996 as a 40% non-performing law ratio as a young kid I was starting the tequila crisis and so I got catapulted in Palermo I never been in Sicily in my life I was born in Milan and at the age of 20 I left for Brussels and London and then I understood the reality of non-performing law because basically you have to for the first time take a file and understand I have no idea what MPL meant so what is it so you give money to someone he hasn't paid back ok why I mean you started running numbers 4 years ago as I moved from an analyst to investor we are one of the largest investor globally in hybrid capital in financials we are around 12 billion euro just in financials and then 4 years ago the couple of my investor told me can you invest in Italian non-performing laws I said listen I have no idea no interest please look at the market and so that what I did I actually did the hard work which I advise all of you to do so first one comes with a solution from a policy makers and hasn't seen what a physical non-performing law means please don't do policy ok and I've seen this several times so what I did for example we I went to visit about 40 loans what do you mean visit if there is a collateral you need to go and see the collateral you need to understand what it is and understood one thing non-performing law can have negative value I give an example Italy lost 25% of industrial production if you have an industrial building and you have a specialist problem and someone says do you want to take this building for free you should say no because the building has negative value so non-performing law can have negative value secondly the theme behind NPL which ultimately is what we think it's all about time value Italy I think has done a unique you know you have a country that is prudent in its landing suddenly GDP minus 10 and 25% of industrial production gets wiped out clearly you have a massive macroeconomic issue and so even what were in my view consider as good loans at time you made it suddenly become problematic now at that point time is of the essence that's the key message I give you why because something that deteriorates at the beginning you need immediately to intervene and here are a couple of big issues first in banking structurally that's what I've analyzed if you were in Santanderu, NICRETO and TESA and you have 100,000 employees as a CEO I can tell you you never sent your best people in the NPL division because the NPL division is when you lend the money and the money has been lost yeah so no one is client facing you're basically dealing with you know the garbage and so what happens do you think the best people in Santanderu and TESA NICRETO do not go and deal with the garbage nobody wants so what happens is when the problem of NPL becomes the biggest portion of your equity you got a problem you have not allocated your Navy SEALs to deal with it they are in the asset management they are in banking, they are in finance division you just left whatever employees that you didn't want to promote it that's a big issue the second issue is within the NPL stock you have three types basically think simply the one that can be dealt statistically big data provision that 5 cents in a dollar bills, nannies, not paid but statistics there are platforms, it's easy you make phone calls the world 5 cents in a dollar and basically statistically you can make money I think the industry works in most countries it's easy the most troublesome are the corporate loans why corporate loans if I'm making ties and I go bankrupt and for 4 years I lost all my employees I have no patents my machinery is old and you think there is collateral value behind it and you're dreaming and then when you get into it you have the three layers of problems you have the corporate entity you have the rights of the workers and so what happens is the complexity is too high so there in my view as a policy I think what every country should facilitate it's an early debt for equity swap which is why in the US ultimately there is higher recovery meaning as soon as the company gets into trouble there has to be a way whereby you can easily convert that into equity I didn't remember all this but in Italy it was still illegal because the framework of the bankruptcy law was set up at the Mussolini days back then Mussolini was a dictatorship so if you went bankrupt because it was a fraud you're still in money because prices were all agreed from the central government and so what happens you need to adjust your bankruptcy code today given the technological changes good entrepreneurs can go bankrupt in good faith and you need to find a quick way to move debt into equity to basically protect what is available Italy in this way has done massive reforms over the last four years I mentioned some some make me laugh but I think they're key in order to accelerate time to action the first one is Italian courts used to close 45 days in summer they take it easy the government said hey 45 days of holidays too long shrink it to 30 days secondly it was a stamp duty so every time you try to buy a loan you need to pay 9% of the value clearly that alone is a huge tax the because of the way you hold collateral very few people can actually buy non-performing loans you need to be regulated and so guess what there are very few people which are regulated last but not least in order and something you mentioned before in Spain which I think is key you need to keep a healthy industry that can buy non-performing loans at all time it's a bit like having the fire brigade if you never have any fire for 10 years your fire brigade ain't good if you have the fire every day they keep on track when regulators and bankers say we don't have any problem with non-performing loans for 10 years happening in Italy what happened you didn't have a healthy ecosystem when you had to sell them because for 10 years nobody could make a living investing in non-performing loans it's as simple as that and so all of a sudden you say now we want to sell it well there's no problem there's nobody can buy nobody even knows how to buy it let alone the capital capital is not an issue it's be able to do the job this is my last experience so it's a question of numbers so we have about 120 people we deployed a billion euro equity in Italy non-performing on real estate more than anybody else and we started three years ago I didn't even know how to spell it out so the issue is it's easy do the hard work so I went to Moped I went to see the commercial agents I understood the value chain we invested in IT average age of the people I had is 33 so embrace IT need to get young guys and what I realized is actually there is a good way of achieving recovery but it's very linked in our case to the real estate sector because that's the easy one nobody is a rocket scientist so I decided to invest in the easiest and that's real estate from legal entity so I don't have any social issue legal entity so that the court goes fast we're not kicking out any individual legal entity cannot cry in court and it's all about the speed so let me tell you why when I hear there is a difference between market prices so as a bank if you have a 15% capital tier one 35 bonds and 50 deposits which is the average bank in Europe you have a weighted average cost of capital of financing of 2% today when people give me capital they want at least 10% back that's an 8% difference per year so if the average Italian court in the north it takes 2 years that's the fastest you need to be stars it's going to take you there is a 15% gap if you go in Sicily and it takes 10 years then there is an 80% gap so even if someone gives you an asset because it's going to take you 8 years to take it then the potential means it's worthless so the first thing the government and policymaker need to do is speed up the court system think about it an MPL is something that's gone bad you take the guy immediately into hospital because if you let it bleed time is only going to make it worse and my advice to policymaker is concentrate on the speed of the action court speed at which the banks deal with it because any time you hide it and you buy time you're only going to make it worse last but not least the idea of having listed ebay system forget it so why does technology work with Amazon of ebay because if I want to buy an iPhone or anything it's equal everybody knows what it is when you create a market I've analyzed 6,000 loans it took me 4 years and I can tell you if you go in Milano each different apartment is different so the idea that you can make an ebay platform out of it is just a joke and the idea that when you use a rating agency to analyze and give a rating after they defaulted on $1 trillion of US loans in America on AAA and you think there's an investor I'm going to believe in the rating so my view is incentivize speed of action on the legal point of view is to make it faster because that gap in prices is the only thing that's going to make it faster last point asset management company public, be aware of it I was 24 years old Banco di Napoli's but bank was set up 1997 it still exists today 20 years later it has hired the thousand to under people so that's a good social way of giving people jobs has recovered virtually nothing the social cost of taxpayer it's huge so the idea of now bypassing let's say what needs to be done by creating big asset management company it's very risky Ireland and Spain are two unique cases GDP did 190 and then did 900 very fast so suddenly the macroeconomic recovery with proper alignment worked very well if this doesn't happen watch out and that's my last comment but thank you very much David, I think we agree on almost everything but I have to tell you it's not often that I'm told that a policy proposal that I make is a joke I sometimes wonder I hear very different views on this depending on whether I'm talking to a bank or whether I'm talking to an investor I'm always curious to know why investors are not that is people who are already in the business are not keen on the platform whereas the banks that I talked to seem to think that it has the potential to be very positive for enhancing liquidity in the market yeah it's very simple so the bank has a financing so if I need to hold this and there's no water it costs me 2% as a bank so they hope by doing an asset management company then public money goes in it and so public money has no accountability first is great you're going to hire lots of people you're going to hire regulators you're going to hire ITs so it's public employees and every politician wants to hire public employees they just get jobs for the next election secondly they hope the government funding goes in it in Italy it's called ATLANTE they tried with GAX and it was different names basically subsidize it so the issue is I want to know who with their own savings wants to go small then go and try to recover it and then you realize maybe you want to buy US Treasury at 2.5% to sleep at night because the effort between how much work you need to do and how much you make is such a difference that you need to understand this and that's the reason why banks have a huge incentive why do they want it because they hope eventually we're going to dump it on the public that's the subsidized rate ok Davie you delivered exactly what we expected thank you very much for that so could I invite now Ed Sibley to take the floor thanks thanks John in my remarks today which will be published in full on the central bank website I'll touch on actually some of the issues that have already been discussed in this panel and the previous one I'm not going to talk much about the problem itself well understood but we'll touch on it I'm going to recall mainly the Irish experience and I've got one slide that will help to illustrate that and then I'll try and draw together some key lessons from the Irish experience for what is it a European problem just in terms of the problem itself as I see it clearly NPLs cause a significant dysfunction in the banking system and they really do hinder the banking system fulfilling its purpose in terms of serving the economy and also serving its customers and part of the reason for that is a breakdown in trust in how the system works and when we talk about trust maybe people think about that as being a bit intangible but they're absolutely quantifiable impacts and again we've heard a little bit about some of that already today but we see it mistrust in terms of investors and unwillingness to invest in banks impacting on price to book values we see mistrust in the banks themselves and we saw earlier a slide around net interest margin we see higher interest rates where banks don't trust borrowers to repay or they don't trust the system in terms of an ability to affect security and we also see mistrust in terms of banks willingness to operate on a cross-border basis and that is impacting in terms of consolidation in the system it's so important therefore that the authorities and including in that the regulators the supervisors are brave and they take action to try and restore some of that trust to take action to address the underlying issues we hear a lot about financial stability issues in terms of addressing NPLs a little bit less about consumer protection and borrower protection issues I think they are they are important if we think about poor borrower outcomes then ultimately that will lead to poor potential outcomes too if I can turn into the Irish experience the Irish banking system has gone through a couple of major transformations in the last 15 years from 2003 to 2008 the system grew by the domestic banking system grew by more than three times it was blown up by mostly by real estate lending weak and in some cases completely absent underwriting management and ultimately unsustainable business models and when that the global financial crisis hit those business models collapsed and ultimately the Irish domestic banks lost 68 billion euros between 2008 and 2012 and NPLs emerged and peaked in 2013 Andrea talked a little earlier about the the graph in the US in terms of up and down NPLs and Japan this is the Irish version I won't spend any time talking about AMCs but I would note that NAMA the Irish AMC was definitely part of the solution but the loans that were transferred to NAMA commercial real estate loans were transferred in 2011 and NPLs peaked in Ireland more than two years later so NAMA was definitely part of the solution but it wasn't all of the solution it wasn't all about all the impacts that have driven down NPLs over that period well this graph shows us at a very high level and I appreciate there's some acronyms which you probably not all of you will understand is over an extended period the authorities had to take sustained increasingly prescriptive action to try and address NPLs in Ireland and that there was a lag a considerable lag between the actions being taken and the effect of those actions and if we look at it as a continuum of measures we have started with making sure the banks were adequately capitalised to deal with the issue that they were recognising the problem in terms of recognising non-performing loans that they were then providing for them adequately and you can see in there that we went beyond well certainly to the edge of insisting on adequate and conservative provisioning and then we went into the strategies for dealing with NPLs and the operational capabilities some of this has already been touched on this morning and then we did it all again so we continually challenged and sought to drive the banking system to address the problems that were in it all these were underpinned protection measures to make sure that borrowers were not significantly disadvantaged by the issue and so what do we see in terms of outcome as I said we peaked in late 2013 as 14 consecutive quarters of reduction in NPLs that's a 50 billion drop the graph somewhat understates the movement in that at this from a ratio perspective was at the same time there was very significant the leveraging happening in the Irish banking system were both good and bad loans so the the graph in those terms would be sharper we've talked already about sales and some of the problems associated with sales now sales have been part of the solution in Ireland both to the asset management vehicle and also into private investors but it's really important to note that a lot of this work has been done through what I would call the really hard yards of engaging with borrowers working out on a cohort by cohort basis restructuring resizing loans affecting security to the extent necessary and possible with operations and the system there what we haven't seen enough of today in Ireland and I would say more broadly is the use of the balance sheet and balance sheet right off to try and actually reflect some of the economic reality around some of the collectability of these loans we can see from a European perspective that a lot of the things that took place in Ireland are being used When the ECB and the SSM commenced, their first action was to do a comprehensive assessment which would include an asset quality review and made sure there was sufficient or tried to make sure there was sufficient capital in the system to deal with the problem. But the banking system as it was in Ireland, the response from the banking system has been wholly inadequate and largely disappointing. So the SSM as we had to do in Ireland has had to challenge the banks, challenge them hard in terms of their strategies, their capabilities, their willingness to address NPLs. And now are taking as we did in Ireland more prescriptive action and we've seen that recently with the issuance of the ECB NPL guidelines which really get at strategy, the operational capability and really the willingness of banks to address this problem. So just if I finish up with the three lessons I would draw from Ireland, I think are particularly relevant from a European perspective, firstly banks are not incentivized on an individual basis to deal with this issue. If we're left to their own devices and there's very, very strong evidence of this, it will not be fixed. Now there's actually, that makes a degree of sense on an individual bank basis but it causes a very significant systemic issue and that's where the authorities including the supervisors need to step in and drive home that this needs to be fixed. Secondly, and this is similar to Bellin's point, no single measure is going to fix the problem. There are a number of measures that need to be taken from a supervisory perspective, from a structural perspective, from a policy perspective that will help to address it and this does take time. Sales seem a little bit like a silver bullet and in some cases as we heard from Santander it may be easier to affect but they are not going to be the solution for all the NPLs that sit in the system. And finally, the build up of these problems actually takes place over a very short period. So the majority of NPLs that we have in Ireland now which are largely mortgages, 10 years since the onset of the crisis were written in the last couple of years of the bubble years. So it's very, very quick these problems get built up in the system, takes a very long time to fix them. Which is why from a supervisory perspective that continued vigilance and intensity of supervision around underwriting practices, around business models, around capital and funding adequacy is absolutely critical. So I'll finish there and I look forward to the discussion. Okay, thank you very much. So I mean I talk from this panel, okay as we hope for differences of view, but I think one thing that definitely comes through from all of your presentations is the importance when we're looking at things from a macro perspective we also need to be very aware of the micro and I think David in particular we really emphasised how micro we need to get. So because we only have 20 minutes left and I think we're going to be live streaming the speech that's why we are on this very strict time. I will invite the speakers to respond to one another but I would also pose at the same time a couple of questions to you as well, just two. So I mean the first, I have to take advantage of the fact that we have representatives from Ireland and Spain on the panel, two countries that have seen measured success in reducing NPLs and it precisely relates to that point. What exactly were the key success factors in your cases? What lessons can we learn for the broader euro area, European endeavour that we're going to go into? Was it the unique starting point conditions that each of your countries found themselves in, where the commonalities in the challenge are in the policy approach attack, for example you didn't mention it but there was also involvement of external agencies in the resolving of the NPL issues in your countries, the Troika for instance, did it play a positive role? I would mention that you may be aware that I was myself a member of the Troika teams in both of your countries so I'm interested to hear your answers on that. And what lessons can be learned for countries that are facing the same policy challenges today, although in a different context? So that's one group of questions and then the other and it's a bit also, I think Davide really emphasised the importance of really getting into the loan files and really understanding what exactly it is that you're investing in. And this is where I have some, there were commonalities in the Irish and the Spanish experiences in particular, a major part of the NPL problem in both of your countries concerned commercial real estate and development loans, that's a bit simplistic I know but in the interest of time, but this is not necessarily the situation that we're seeing in countries that are confronted with high NPL stocks today, for example the SME portfolio, the non-performing SME portfolio is relatively large in some countries and Davide has explained to us how difficult it is to go to analyse that. So what insights could you offer in terms of addressing high NPLs of those particular asset classes and how successful have you been in addressing these issues? We know that there have been big successes on the commercial real estate side but I think there were also issues. Not necessarily for the two of you, I'd be interested to hear and I see Ars de Buda wants to get in so I'll start with you, Ars de Buda, if you've got some reactions to some, or indeed to the presentations of the colleagues. I think the treatment of the Spanish crisis this time was unsuccessful. But this is not an old battle, but I'll have to say it, in the 80s it was what I considered a success. Why? From six examiners who were able to examine the quality of the bottle, we passed 200 in a little more than two years. Those people were ready to identify the real size themselves, not auditors, analysts or whatever. They went in, dirtied their hands and so on. And out of 60 banks, three had enough assets to pay out the other 53 were sold out. Satisfactorily, with no recidives and no claims from the buyers. What was the heterodoxical problem? But it worked fine. Who paid for the bill? We are now obsessed to pay for the burial. How much should we pay for the burial? And who should worry about not having burials? But that's not the case. Now, there was a full awareness that there was a loss. The loss is a loss. A hole is a hole. It has to be covered somewhere. It doesn't disappear by magics. So it was fully covered, 50 by the government and the industry. And it worked nicely. No recidives, only a few mergers, and no claims about bad diagnosis to be. Now, I think that's my answer. I'll just make a comment, why I think, for example, the difference in islands being Italy. So first, Ireland and Spain, they raised their hands. Sorry, we got a problem. 10% of GDP. Secondly, oh, shit, we don't have enough money to pay for it. So money in the European stability mechanism. So suddenly, change of governance. People came, Klaus Regling, its team, IMF, ECB, people went in. So suddenly, the guy that made the loan was not in charge any longer. The board, the guy that got paid, the regulator that protected the lawyers out. You send foreigners in. They come in, they look at the situation. Quick reaction, a loss is a loss. Time of action, you save whatever can be saved and recovered. Given a second example, Italy. They come in, it says, we don't got any problem. Well, no problem. That has been the policy written and signed for seven years. It's still 10% of GDP. And it's inevitable, because when your industrial production shrunk by 25, which was happening in the 29, not even if you're Superman. You can recover SME loans. It's just impossible. So what happens is, in my view, for example, Italy should have raised their hands. Then there would have been a quicker change in corporate governance. So all the boards of Vicenza, Veneto, which had no equity, they were lending money for you to buy stocks. I mean, there was no equity. Under Italian law, it's a criminal act to lend money for you to buy shares, because basically, there's no equity. That's a bit late. No, but what I'm saying is, these guys have been doing it for 20 years. So clearly, there has been a failure by someone, by the local authority, but it's called the finanzamento sochi. And it's illegal, criminal. And these guys were doing it. So what happens? Then when the ECB came in, suddenly, they realized it all of a sudden. And so hence, my experience is, when there is an MPL crisis, you got to go in fast and change the corporate governance of everyone. Managers first, it's always a bank's problem. The key problem lies with the manager, the board, and often the shareholders, like in the case of Spain, shareholders, big property developer, both shares, to lend money to themselves. All the same happened, I can tell you, in Veneto and Vicenza, happening in Monterey Palski. So the first is the change in government governance, because when at that point, you can actually intervene. And then intervene, you save what is saveable. But there's no magic. There's no Steve Jobs in MPL, yeah? There's no Apple, there's no Google. It is hard work, real economy, because you have thousands and thousands of just real economy loans. That's my advice. Okay, thank you for that. Belen, Ed, do you want to address any of those points? Well, I do think that we were successful, I must say, but and the key thing, I think it's... Again, for me, there's only one word, which is credibility. You are only successful when you get to... Others believe that what you go for it, and you really go for it. And I think that in our case, we did go for it, and it was not easy. And that was a huge issue for us when we started with the AMC, and we started dealing with, from debtors to potential buyers, no one thought we would do anything seriously because they thought we were too weak. So debtors thought that we would not go for that because we could have political issues, potential buyers thought, you're gonna die in any case, or sit and watch how you die, and then I'll go and buy for free. So for us, the key thing is have a combination of decisions and a real strong stand in terms of we're doing it, and it's for real, and we have to survive in the long run, so we're not gonna do anything stupid in the short run because it may be difficult. So for me, that's the key. When others start believing that you go for real, and that entails a long list of things, but that is the one. Okay, thank you for that, Ed. I'd agree with both those interventions. So early recognition, early action, persistence, and a variety of measures, but there is nothing to substitute the hard work of getting through the loans, whether it's done by the banks, whether it's done by an asset management vehicle, or whether it's done outside the banking system, those loans don't disappear, they still need to be worked, and so that I think is critically important, as is the point around, that there isn't one solution, we need multiple. And I would finish up just by noting that while the trajectory is very good in Spain and very good in Ireland, relatively speaking to the rest of the EU, it's not like we're out of the woods, so NPLs or foreclosed assets are more problematic in Spain, they're still there, they're still too high, they still need action and determination, I don't think we can claim victory yet. Thank you, Ed. Just one comment I cannot resist, something Davideus said. You said that it's always the worst people that go to solve the problem, I cannot agree with that since I was, but I was one of those ones, but one thing that I would ask everyone to say, do not call it bat bank, because it's the worst horrible thing you can do to create something and call it bat something, whatever, then you're dead. Historically, inside the bank, people going, they'll send you an investment bank, asset management sales, and then if you're in a good bureaucrat, they send you an NPL, it's only when it becomes the core business that then you have a problem. Why? Because even if you take the super McKinsey guy, and the guy hasn't done anything for 20 years, before he gets there, it takes him three years to learn, and three years in NPL, it's a 25% hit to your gross book. Because of the leverage of a bank, one to 15, you just do the math, it's basic arithmetic, that's why I think it's key, the regulators keep on forcing banks to sell NPL because you need to keep people that can come and intervene. If not when you arrive after 15 years and say, oh, sorry, we got an NPL problem, then there's no one to treat it. And then the only way is taxpayer or full bail in, bail in, remember these are all taxpayers. In bank, within a bank after structure, even loan bonds are only bought by someone eventually who's a retail. Okay, I want to give the order.