Shearman & Sterling LLP | Financial Regulatory Developments Focus | New EU Requirements On Minimum Loan Loss Coverage For Newly Originated Loans
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  • New EU Requirements On Minimum Loan Loss Coverage For Newly Originated Loans
    04/25/2019
    An EU Regulation amending the Capital Requirements Regulation introducing a statutory prudential backstop, and requiring banks to have minimum loan loss coverage for newly originated loans, has been published in the Official Journal of the European Union. The Amending Regulation is part of the package of legislative and non-legislative measures proposed by the European Commission in March 2018 to address remaining and future non-performing loans in the EU.

    The Amending Regulation builds on existing CRR provisions, requiring a deduction from own funds where non-performing exposures are not sufficiently covered. The Amending Regulation establishes a set of conditions for the classification of NPLs, which builds on the existing framework in the existing Implementing Technical Standards on Supervisory Reporting. It also 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. National regulators will be able to use their supervisory powers under the Capital Requirements Directive to address situations in which a bank's NPLs are insufficiently covered by the backstop.

    The Amending Regulation enters into force on April 26, 2019 and will apply directly across the EU. The prudential backstop requirements will apply to exposures originated after April 26, 2019 and to exposures originated before that date but modified after that date in a manner that increases the firm's exposure to the obligor. The European Banking Authority published final Guidelines on management of NPLs and forborne exposures, which firms must apply from June 30, 2019.

    View the Amending Regulation.

    View details of the Commission's proposed package.

    View details of the EBA's Guidelines.

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