Addendum to the ECB Guidance to banks on non-performing loans (NPLs)

European Central Bank (ECB)

Despite NPLs have started to decline, a number of banks in Member States across the Euro area are currently experiencing high levels of NPLs which ultimately have a negative impact on bank lending to the economy. In this regard, addressing asset quality issues is one of the key priorities for ECB banking supervision.

In March 2017, the ECB published its Final Guidance to banks on NPLs which clarifies supervisory expectations regarding identification, management, measurement and write-offs of NPLs. This guidance stresses the need for timely provisioning and write-off practices related to NPL as these serve to strengthen the balance sheet of banks enabling them to (re)focus on their core business, most notably lending to the economy.

In this context, the ECB launched in October 2017 a consultation on the draft addendum to its guidance to banks on NPLs, specifying quantitative supervisory expectations concerning the minimum levels of prudential provisions expected for NPEs. These expectations should be seen as prudential provisioning backstops aimed at a prudent treatment of NPEs and therefore avoiding the excessive build-up of non-covered aged NPEs on banks’ balance sheets in the future. In particular, this addendum covers the following aspects:

  • Definitions applied in the addendum.
  • Prudential provisioning backstop.
  • Related supervisory reporting and public disclosure.

This addendum does not intend to substitute or supersede any applicable regulatory or accounting requirement or guidance from the existing EU regulatory framework.

This Technical Note includes an analysis of the main content of this addendum.

Executive Summary

This addendum to the ECB’s Final Guidance to banks on NPL provides information about the definitions applied on it, the prudential provision backstop, and the related supervisory reporting and public disclosure.

Area of application

This addendum is applicable to all significant banks directly supervised by the ECB. The backstops are applicable at a minimum to new NPEs classified as such from January 2018 onward.

Main content

  • Definitions applied in this addendum. This addendum sets out some definition to be considered, such as new NPEs, NPE vintage, eligible credit protection to secure exposures, or the definition of secured and unsecured parts of NPEs.
  • Prudential provision backstop. It provides the following information regarding the prudential provision backstops: functioning, adjustments, deviations, categories, and calibration.
  • Related supervisory reporting and public disclosure. According to this addendum information on data to be reported to Joint Supervisory Teams (JSTs), and on public disclosure is provided.

Download the technical note by clicking here.