ECB requires additional provision over new NPLs

Predictions

ECB requires additional provision over new NPLs

The European Central Bank plans to ask euro area banks to set aside more cash to cover bad loans, making it prohibitively expensive for lenders to keep sitting on them.

Starting January 1, it will give lenders two years to set aside funds to cover 100 percent of the value of their newly classified non-performing unsecured debt and seven years to cover all secured bad debt, the draft showed.

The measures however will not affect the nearly 1 trillion euros’ worth of bad debt already on the books. The new measures are intended to prevent another bad debt pile from forming.

Compliance

In the draft, the ECB said that while the guidelines were non-binding, banks were expected to explain any deviations.

Banks should report on the compliance with the prudential provisioning backstop outlined in this addendum at least annually and explain deviations to the supervisor.

How can Deloitte help

ECB’s NPL guidelines are providing the operating framework for the banks to re-assess the entire lending process from origination to legal workout.

The measure above is seen as a supervisory measure to apply pressure to the sector to adopt the guidelines and integrate such in the entire lending process.

Deloitte can help you:

  • Assess the entire lending process to establish potential gaps that contribute the generation of NPLs.
  • Evaluate the forbearance/restructuring methodologies to establish effectiveness on the long term health of the loan
  • Stress your workout strategy and operations to determine which areas could potentially contribute to more efficient troubled loan resolution

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