Non Performing Loans

1. Non Performing Loans FachhochschuleF.WirtschaftBerlin BerlinSchoolofEconomics Tawah Ngwa Derrick

2. Introduction • What are Non Performing Loans(NPLs) • How do NPLs originate? • What Strategies are there to combat NPLs • Are there any tools and/or Markets for managing credit risks? • Any Future Perspectives? Tawah Ngwa Derrick

3. Non Performing Loans defined • “A loan is nonperforming when payments of interest and principal are past due by 90 days or more or at least 90 days of interest payment have been capitalised, refinanced or delayed by agreements; or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full”-IMF • NPL= default or close to being in default Tawah Ngwa Derrick

4. Origins of NPLs • Banks~lending although nowadays banks are taking on more and more other functions • Problems~Information assymetry, Adverse selection and Moral hazard • Banks are then faced with credit risks • Credit risks often transform into loan losses Tawah Ngwa Derrick

5. Origins of NPLs cont‘d • Credit risks =>banks´ true core business is “the profitable management of risks” • Credit risk=> quality of loans • Poor quality loans~ bank failures • By end of the 1990s loans made up 60% of banks total assets • Outstanding loans= $ 3 trillion • Interest and fees on loans= 2/3 of banks operating income • Loans finance:manufacturers, distributors, service firms, farmers, home buyers, commercial real estate developers,consumers Tawah Ngwa Derrick

6. Empirical Development of NPLs • Savings and Loans thrifts crises in the U.S.A in the 1980s~ consumer loans and real estate loans • NPLs in Japan~ real estate burble • NPLs in China~ Policy loans and housing guarantees • NPLs in Europe (Germany)~“over-banked“ Market,Basel 2, Poor rating and cost of refinancing Tawah Ngwa Derrick

7. Market Volume of NPL by country Tawah Ngwa Derrick

8. Market Actors in Germany Tawah Ngwa Derrick

9. What Strategies are there to deal with NPLs • Work-out plan • Joint Venture • Single Asset Trading • Securitization -ABS (Asset Based Securitization) -MBS (Mortgage Based Securitization) • Centralised governmental Agency • Resolution Trust Corporation(RTC) in the U.S. in the 1980s • Asset Management Company(AMC) in China etc. Tawah Ngwa Derrick

10. Tawah Ngwa Derrick

11. Are there Tools and/or Markets for Managing Credit Risks? • Credit Derivatives -Tools used to repackage and transfer Credit risks -2 or 3 way contract in which the financial risk associated with an underlying asset is isolated and transfered to contract parties -Help make markets more liquid and efficient -Investors in Credit Derivatives are Banks, Institutional Investors etc. Tawah Ngwa Derrick

12. Tawah Ngwa Derrick

13. How do Credit Derivatives Function? • Credit Default Swap • Total (Rate of ) Return (TR) Swap • Credit Option • Variation=“Exotic” Credit Derivative - Basket Default Swap -Multi-named Default Swap -Synthetic Collaterized Debt Obligations (CDOs -Collaterized Loan Obligations (CLOs) -Credit Linked Notes -Transferred Structures Tawah Ngwa Derrick

14. Tawah Ngwa Derrick

15. Any Future Perspectives? • Given the size of NPLs and the market; and the Credit risks market, there are good prospects • But this all depends on wether the investors themselves can overcome the same difficulties facing banks-Info assymetry and moral hazards Tawah Ngwa Derrick

16. Hope i did add something to your Wealth of Knowledge through my presentation Thanks For Listening!!! Tawah Ngwa Derrick