Addressing the eurozone’s ‘lemons’ problem for NPLs

State-aided securitisation of riskiest tranches could prompt purchases of loans, write ECB staffers

In George Akerlof’s market for lemons, informational asymmetries arise because buyers know less about asset quality than sellers

The large stock of non-performing loans (NPLs) on the balance sheets of eurozone banks continues to be an important cause of concern for policymakers and a priority for the European Central Bank. In this regard, the publication of the ECB’s guidance for banks on NPLs in March was an important milestone. History has shown that financial crises and/or prolonged economic contractions often trigger abrupt and substantial increases in NPLs, as collateral valuations decrease and borrowers face