Grasping Credit Risks: A Year in the Life of the Credit Secondary Market Act
By Jürgen Sonder and Ludwig J. Weber
Expanded market for delinquent loans enhances financial security
In the heart of the financial system's storm, battling geopolitical turbulence and an ailing economy, Michael Theurer, a board member of the German Bundesbank, stated at the Financial Stability Report 2024 launch on November 21 that a robust financial system is our top priority. The resilience of the financial market is paramount, even more so in challenging economic times, as corporate insolvencies creep eerily close to pre-pandemic levels, signaling an imminent upward trend in 2025.
Shedding Light on the Real Estate Sector
The latest NPL Barometer, a collaborative effort between the Federal Association of Credit Acquisition and Servicing (BKS) and the Frankfurt School of Finance & Management, shines a spotlight on the increasing numbers of non-performing loans (NPLs). Across all asset classes, sectors such as consumer loans, small and medium-sized enterprises, and commercial real estate, are showing signs of NPL growth, particularly in the real estate sector - an area that has drawn the Bundesbank’s attention.
Forecasting Future Problems, Preventing Them Today
According to the BKS’s annual analysis, German banks can expect NPLs totaling more than 40 billion euros across industries - credit risks are becoming increasingly significant for banks. The key to tackling potential credit risks lies in prevention. An active, professional secondary market for NPLs can significantly aid the financial industry in averting a self-reinforcing downward spiral.
The Progression of the Credit Secondary Market Act
The EU Directive on Credit Services and Credit Purchasers serves as a crucial stepping stone in creating a unified legal framework for the secondary market across the European Union. Adopted in 2021 and implemented in Germany as the Credit Secondary Market Act (KrZwMG) on December 30, 2023, it governs new obligations for credit institutions and buyers of non-performing loans, requirements for credit service providers, and their supervision by BaFin.
Setting the Standard: BaFin's New Framework
Credit service providers now require a permit from BaFin for their activities on the secondary market. Approved providers can operate throughout the EU. As most of the German secondary market for NPLs, represented by the members of the BKS, had fulfilled all KrZwMG requirements by summer 2024, the secondary market stands ready to assist banks, savings banks, and state banks in cleaning up their balance sheets, improving risk structures, securing liquidity, and granting new loans to borrowers.
Appraising the Portfolios: Due Diligence Matters
Investors find NPL portfolios attractive due to the potential discount on non-performing claims. The key to achieving a risk-adjusted return lies in a thorough due diligence process, enabling a comprehensive evaluation of the claims, their derived financial and legal opportunities and risks, and the prospects for the respective portfolios. Crisis expertise plays a vital role in this assessment.
Reducing Debt: The Importance of Restructuring
Assessing default risks, particularly in corporate and real estate financing, is essential. For institutions grappling with borrower distress, understanding if the company’s restructuring can be supported is crucial. The success in the restructuring of companies mirrors the NPL sector - experts working in harmony is the key to achieving success. This collaboration has facilitated the reduction of NPL balances for European and German credit institutions over recent years, which has undoubtedly played a role in maintaining financial market stability, especially during the phase of exceptionally high interest rates caused by the pandemic.
*) Jürgen Sonder is the President of the Federal Association of Credit Acquisition and Servicing and a member of the Senior Advisory Board of the Intrum Group in Germany. Dr. Ludwig J. Weber is an expert in corporate financing and restructuring at the law firm Schultze & Braun, advising financiers and investors on the evaluation of credit portfolios and NPL transactions.
Detailing the Current Climate:
- Struggling real estate sector: The commercial real estate sector in Germany experienced a 40% surge in NPLs from early 2022 to early 2025[1][3], reaching an NPL ratio of 5.9%[1]. The increasing NPL levels are primarily attributed to higher borrowing costs, declining property valuations, and tenant payment challenges[1][3]. KPMG points to distress in office and retail segments, while Savills highlights diverging regional trends[1][3].
- Credit market shifts: German banks reported slight tightening in corporate loan standards, particularly for SMEs, in Q1 2025, due to risk considerations[5]. In contrast, residential mortgage loan standards eased[5]. SME loan rejection rates have risen, while the rates for large firms have remained stable[2][5].
- Eroded profitability: ECB rate decisions have negatively affected banks’ net interest income, exerting pressure on lending policies for corporate loans and consumer credit[5].
Implications of the KrZwMG:
Though the KrZwMG is not extensively mentioned in recent reports, its broader framework is aimed at managing NPL exposure. Effects inferred from current market dynamics include:- Secondary market liquidity: The provisions for NPL securitization and sales under the KrZwMG may have facilitated portfolio transactions, though Bafin's recent reduction of systemic risk buffers (April 2025) suggests caution amid the rising corporate insolvencies[4].- Regulatory equilibrium: BaFin's reduction of systemic risk buffers for residential real estate (to release ~€20bn) contrasts with the unaddressed commercial sector risks, indicating a emphasis on housing stability over commercial NPL mitigation[4]. This regulatory landscape, combined with persistent NPL growth, highlights ongoing challenges in commercial real estate debt resolution. The absence of explicit KrZwMG references in recent data suggests its impact may be overshadowed by macroprudential measures and ECB-driven liquidity constraints.
- In the process of battling geopolitical turbulence and an ailing economy, the Bundesbank's attention has been drawn to the real estate sector, where corporate insolvencies and non-performing loans (NPLs) are growing remarkably close to pre-pandemic levels.
- The second quarter of 2025 saw a marked increase in the number of non-performing loans across various asset classes, particularly in the real estate sector, as outlined in the BKS's annual analysis.
- To prevent potential credit risks, an active, professional secondary market for non-performing loans can aid the financial industry in averting a self-reinforcing downward spiral, as forecasted by the BKS.
- By the summer of 2024, most of the German secondary market for non-performing loans, represented by the members of the BKS, had fulfilled all requirements of the Credit Secondary Market Act (KrZwMG), making it ready to assist banks and state banks in cleaning up their balance sheets and reducing debt through restructuring.
