European Central Bank Amends Its Supervisory Expectations on Non-Performing Loans
08/22/2019Following the coming into force on April 26, 2019 of an EU regulation amending the Capital Requirements Regulation that introduced a statutory prudential backstop, and requires banks to have minimum loan loss coverage for newly originated loans, the European Central Bank has published a communication on supervisory coverage expectations for non-performing loans. The ECB communication announces that the ECB has revised its supervisory expectations on NPLs that it published in its March 2018 Addendum to the Guidance for Eurozone banks on NPLs as a result of the Amending Regulation. Neither the Guidance nor the Addendum are legally binding, but both apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries.
The Amending Regulation builds on existing CRR provisions, requiring a deduction from own funds where non-performing exposures are not sufficiently covered. It also establishes a set of conditions for the classification of NPLs, supplementing the framework in the existing Implementing Technical Standards on Supervisory Reporting. The Amending Regulation makes provision for different levels of stringency depending on whether an exposure is collateralized or not and on the reason for the classification of an exposure as non-performing.
The ECB has amended the Addendum to reflect the scope of the new CRR provisions, such that it does not cover NPLs arising from loans originated after April 26, 2019. These NPLs are subject to the CRR requirements, although the ECB notes that it will be monitoring the risks arising from them.
The Addendum has also been amended to align with the Amending Regulation on prudential provisioning timeframes, transitional implementation framework and the split of secured exposures, as well as the treatment of NPLs guaranteed or insured by an official export credit agency.
View the ECB Communication.
View the ECB press release.
View details of the ECB's original Addendum.
View details of the Amending Regulation.
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