European Central Bank Confirms Its Approach to Supervising Non-Performing Loans Levels

Following its consultation in late 2017, the European Central Bank has published the final Addendum to its Guidance for Eurozone banks on non-performing loans. The ECB published its final Guidance for banks on NPLs on March 20, 2017. The Addendum sets out the ECB’s supervisory expectations on the minimum levels of prudential provisions expected for new NPLs. It is intended to function as a starting point for dialogue between the ECB and individual institutions. As with the Guidance, the Addendum is not legally binding but would apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. An institution that does not comply with the ECB’s supervisory expectations, as set out in the Addendum, would be able to provide its rationale to the ECB as part of the dialogue. The supervisory expectations in the Addendum will be incorporated into the 2021 Supervisory Review and Evaluation Process. In the meantime, firms are expected to review their credit underwriting policies and begin provisioning for any loan classified as a NPL.

The Addendum concerns loans classified as NPLs after April 1, 2018, which means that new unsecured NPLs must be fully covered after a period of two years from the date of their classification as NPLs.

The ECB also published a Feedback Statement which summarizes the responses it received to its consultation on the proposed Addendum and indicates where changes to the proposed Addendum have been made as a result.

The ECB notes that neither the Guidance on NPLs nor the Addendum constitute Pillar 1 or Pillar 2 requirements. They contain only supervisory expectations that will form part of the supervisory dialogue. Furthermore, there may be differences between them and the proposed Pillar 1 requirements set out in the European Commission’s legislative proposal for the treatment of NPLs published on March 14, 2018.

View the Addendum.

View the Feedback Statement to responses to the consultation.

View further information about the ECB’s supervision of NPLs.

View the Commission’s proposed NPL package.