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Non-performing loans (NPLs) framework

European Banking Authority (EBA) / European Central Bank (ECB) / European Commission (EC)

Although NPLs have started to decline, a number of banks in Member States across the Euro area are still experiencing high levels, which ultimately have a negative impact on bank lending to the economy. In this context, in July 2017, the European Council concluded an Action Plan to tackle NPLs in Europe in order to prevent the emergence and accumulation of new NPEs on banks’ balance sheets.

According to this Action Plan, the ECB published Final Guidance to banks on NPLs with the aim at developing a consistent supervisory approach (supervisory expectations) regarding the identification, measurement, management and write-off of NPLs in March 2017.

Further, in March 2018 several documents were published regarding NPLs. Thus, the ECB published the final Addendum to the ECB Guidance to banks on NPLs, specifying quantitative supervisory expectations concerning the minimum levels of prudential provisions expected for NPEs; the EBA published a Consultation Paper (CP) on Guidelines (GL) on management of NPEs and FBEs which specifies, among others, sound risk management practices for managing NPE and FBE; and the EC published a Proposal for a Regulation on amending the CRR as regards minimum loss coverage for NPEs which aims at ensuring banks set aside funds to cover the risks associated with loans issued in the future that may become NPLs.

This Technical Note summarises the content of the NPL framework which includes references to the ECB Guidance to banks on NPLs and Addendum to the ECB Guidance on NPL, the EBA CP on GL on management of NPE and FBE, and the EC Proposal for a Regulation on amending the CRR as regards minimum loss coverage for NPEs.

Executive Summary

The ECB Guidance on NPLs and the EBA CP GL on NPE and FBE cover recommendations on NPLs. Further, the ECB Addendum provides information about the prudential provisioning expectations, whereas the EC Proposal aims at ensuring sufficient loss coverage.

Area of application

The ECB Guidance and the Addendum on NPLs are addressed to significant institutions; the EBA CP GL on NPE and forbearance is addressed to all credit institutions; and the EC Proposal applies to all CRR institutions.

Main content

ECB Guidance on NPL vs EBA CP GL on NPE and forbearance. This Guidance covers:

  • NPL strategy (e.g. assessing the operating environment, developing the NPL strategy, and implementing the operational plan).
  • Governance and operations (e.g. steering and decision-making, NPL operating model, and control framework).
  • Forbearance (e.g. forbearance options and viability).
  • NPL recognition (e.g. application of NPE definition, and link between NPE and forbearance).
  • NPL impairment measurement (e.g. individual and collective estimation of provisions, and other aspects of impairment).
  • Collateral valuation for immovable and movable property (e.g. governance, procedures and controls).
  • Supervisory reporting and evaluation of management of NPLs.

ECB Addendum to the ECB Guidance on NPL. This Addendum sets out definitions to be considered, such as new NPEs, NPE vintage, eligible credit protection to secure exposures, etc. Further, it also provides information on prudential provisioning expectations (e.g. minimum level).

EC Proposal for a Regulation on amending the CRR as regards minimum loss coverage for NPE. This Proposal introduces amendments to the CRR regarding the definition of NPE, forbearance measures, the deduction of NPEs, the introduction of a principle of prudential backstop, etc.

Download the technical note by clicking here.


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