Non-performing loans and the cost of deleveraging: The Italian experience

•The NPL disposals results from a regulatory and accounting tightening on asset quality.•Securitisations permit lower deleveraging costs with respect to the straight sale.•The support of public guarantees on securitization minimizes the cost of deleveraging.•The high variability of outcomes is due to the opacity characterizing the NPL assessment. The massive stock of Non-Performing Loans (NPLs) in Europe has forced regulatory and supervisory authorities to promote debate on their management and timely disposal. Simultaneously, the transition to IFRS 9 created the need for higher provisioning and for weighting sale scenarios in the assessment of NPLs. This study, using a scenario analysis based on the Italian experience of the NPL resolution process, focuses on the cost of deleveraging by comparing the alternative strategies of direct sale and securitization. The study highlights the impact of the assumptions derived from the portfolio assessment and the additional cost arising from the uncertainties surrounding the appropriate recovery procedure. It demonstrates that securitization minimises this cost, while estimating the benefit derived from the support of State-backed guarantees. These findings provide useful insights for policy makers, suggesting the promotion of further measures that aim to reduce the transfer of value from banks to third parties.