Hedge funds and private-equity investors are bidding up prices of some troubled assets in Europe, sparking a surge in sales by banks seeking to rid themselves of soured corporate loans.

For years after the financial crisis, European banks resisted selling their corporate loans for fear of having to record heavy losses. But recently, some European lenders have reversed their stance as demand for these assets has jumped. One reason for the shift: Defaults and bankruptcy filings have declined in the U.S., leaving investors with...