Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Banking Authority Seeks Feedback on Draft Guidelines on Managing Non-Performing Exposures
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  • European Banking Authority Seeks Feedback on Draft Guidelines on Managing Non-Performing Exposures
    The European Banking Authority has commenced a consultation on draft Guidelines on the management of non-performing and forborne exposures. The Capital Requirements Directive requires in-scope banks and investment firms to have robust governance arrangements and effective processes to identify, manage, monitor and report the risks to which the firm is exposed. The EBA is responsible for issuing related guidelines to further harmonize across the EU how firms implement these obligations.

    Since the 2007/08 financial crisis, there has been a build-up of non-performing loans in the EU, which impacts banks’ viability and lending capabilities. In March 2017, the European Central Bank finalized its Guidance on managing NPLs, which applies to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. The EBA’s draft Guidelines similarly aim to reduce the build-up of non-performing exposures (NPEs) in a bank’s balance sheet.

    The EBA’s proposed Guidelines set out sound risk management practices for banks for managing NPEs, forborne exposures (FBE) and foreclosed assets and apply to all exposures that fall within the definition of non-performing and forbearance in the ITS on Supervisory Reporting (Commission Implementing Regulation (EU) No 680/2014). The finalized Guidelines will also apply to national regulators responsible for assessing firms’ risk management of NPEs and FBEs, as part of the Supervisory Review and Evaluation Process. National regulators must also ensure that firms comply with the Guidelines on an individual, sub-consolidated and consolidated basis.

    The EBA is proposing a two-tier system, which would subject firms with high levels of NPEs to more onerous requirements. It is proposed that firms with high levels of NPEs (above 5%) or with a material amount of NPEs in an individual portfolio or a high concentration to a geographic region, economic sector or group of connected clients, be required to develop an NPE strategy and establish NPE governance and operations framework for all NPEs and portfolios with material levels of NPEs.

    The EBA proposes that all firms should establish an early warning and reporting and escalation process in relation to potential non-performing borrowers as well as implement a variety of forbearance measures. Firms will also need to implement governance and operational structures around NPE recognition and on NPE impairment measurements and write-offs. The proposed Guidelines also require all firms to adopt policies and procedures which set out clear expectations on the valuation of immovable and movable property held as collateral for NPEs.

    Responses to the consultation should be provided by June 8, 2018. The EBA intends to finalize the guidelines during summer 2018. The EBA is proposing that the Guidelines would apply from January 1, 2019.

    View the EBA’s consultation paper.

    View the ECB’s Guidance.