Europe is awash with bad debt. European banks, companies, and public institutions are owed some $900 billion of nonperforming credits,1 and as the economy of the region slows, its credit troubles are growing. All lenders try to recover as much of their nonperforming credits as they can, but some do a better job than others. Among small Italian banks, for example, the best at managing bad debt recover 20 percent more than the average, largely because they tailor their recovery processes to the particular types of bad debt they manage and work very closely with debtors.
A handful of large banks have discerned the seeds of a new business in these facts: they are developing specialist businesses to manage their own and other companies' nonperforming credits on an industrial scale, using recovery processes tailored to each type of credit, and charging fees of 10 to 15 percent of the amount recovered. Despite the fees, the debt-recovery expertise of these banks means that their clients should be better off for using their services.
The potential clients of such banks include other banks, which on average hold 45 to 50 percent of a country's nonperforming credits; industrial companies, which hold...