European Central Bank Proposes Prudential Backstops for Non-Performing Loans

The European Central Bank has published for consultation an Addendum to its Guidance for banks on non-performing loans. The ECB published its final Guidance for banks on NPLs on March 20, 2017. The proposed Addendum sets out the ECB's proposal to supplement its Guidance with quantitative supervisory expectations concerning the minimum levels of prudential provisions expected for new NPLs. The ECB notes that the proposed measures should be regarded as prudential backstops which are intended to prevent the excessive future build-up of non-covered aged NPLs on banks' balance sheets. The ECB is proposing that banks would be expected to provide full coverage for the unsecured portion of new NPLs after two years at the latest and for the secured portion after seven years at the latest.

As with the Guidance, the proposed Addendum would be non-binding but would apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. If a bank did not comply with the Addendum, then it would need to explain its non-compliance. Any non-compliance could lead to supervisory action being taken. The ECB intends the Addendum to become applicable as soon as it is finalized and for the backstops to apply to new NPLs classified as non-performing from January 2018.

The consultation closes on December 8, 2017

View the ECB's proposed Addendum.

View the ECB's Guidance on NPLs.