Non-Performing Loans (NPL)
On the ECB guidance regarding dealing with NPL
Some banks in the euro area currently have sizable portfolios of non-performing loans (NPLs). This has a detrimental impact on bank lending to businesses and is the key risk for banks in the euro area.
A planned and sustainable reduction in non-performing loans is essential on banks’ balance sheets because, in conjunction with a general recovery in the economy, this has a positive effect on lending policies and the economy as a result.
The topic is therefore of particular importance for both the supervisor as well as politics. The fact that there even were serious voices calling for the establishment of a large, pan-European Bad Bank shows how central this topic is. This summer, the European Commission and EcoFin both became active on this issue by publishing a consultation on secondary markets for NPLs and devising an action plan, respectively. Finally, the markets for non- and sub-performing loans are also keeping a close watch on the regulatory development.
With the aim of decreasing the number of non-performing loans, the ECB published guidance for banks regarding non-performing loans on 20 March 2017 that presents its expectations and best practices in dealing with NPLs. In the context of the published requirements, banks should reduce their NPL portfolios by applying uniform approaches and definitions, thereby improving the quality of their assets. The addendum to this guidance, especially, which was published on 4 October 2017 and concretised the supervision’s quantitative expectations regarding the minimum amount of supervisory risk provisioning for new NPLs, led to discussions at banks and within EU committees. According to the addendum, for loans that receive NPL status after 1 January 2018, complete coverage would have to be held available for the unsecured part after 2 years at the latest and, for the secured part of the NPL, after 7 years at the latest.
Even though new stipulations regarding NPLs have already been implemented over the past few years, the publication of the ECB guidance creates numerous new NPL requirements for banks. Read our latest publication.