Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Commission Launches Package to Address Non-Performing Loans Build-Up in the EU
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  • European Commission Launches Package to Address Non-Performing Loans Build-Up in the EU
    The European Commission has launched a package of legislative and non-legislative measures to address remaining and future non-performing loans in the EU. Since the 2007/8 financial crisis, there has been a build-up of NPLs in the EU, which impacts banks’ viability and lending capabilities. NPLs are loans where the borrower has difficulties in making scheduled payments to cover interest and/or capital reimbursements. A loan is classified as an NPL when it is either more than 90 days past due or the loan is assessed as unlikely to be repaid by the borrower.

    The package comprises:
    • A proposed Regulation amending the Capital Requirements Regulation to introduce a statutory prudential backstop, which will require banks to have minimum loan loss coverage for newly originated loans;
    • A proposed new Directive on credit services, credit purchasers and the recovery of collateral which seeks to enable banks to deal more efficiently with NPLs by introducing an accelerated extrajudicial collateral enforcement mechanism and facilitating the outsourcing of servicing of loans to specialized credit servicers; and
    • A Technical Blueprint for Member States to set up National Asset Management Companies where NPLs have become a significant issue in a particular Member State. It is intended for use in restructuring of banks in compliance with the EU Bank Recovery and Resolution Directive and State Aid rules.

    The CRR sets out requirements for firms to determine own funds. The proposed Regulation builds on those provisions by requiring a deduction from own funds where non-performing exposures are not sufficiently covered. The proposed Regulation establishes a set of conditions for the classification of NPEs 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 the reason of the classification of an exposure as non-performing. The Commission intends the prudential backstop requirements to apply to exposures originated after March 14, 2018, on the basis that firms should have sufficient understanding of how the new prudential backstop would apply.

    The ability of national regulators to exercise their supervisory powers under the Capital Requirements Directive would not be impacted by the planned prudential backstop. National regulators will be able to determine, on a case-by-case basis, that a firm has not covered its NPEs sufficiently and require the firm to apply a specific policy or treatment towards those exposures.

    The proposed Directive on credit services, credit purchasers and the recovery of collateral provides an EU-level framework and requirements for credit servicers acting on behalf of credit institutions or credit purchasers in relation to credit agreements issued by a credit institution or one of its subsidiaries. Uniform rules are set out for the authorization of credit servicers and the passporting of those services across the EU. The proposed Directive also provides for some regulation of the transfer of credit agreements by credit institutions to credit purchasers, including imposing reporting obligations on credit institutions. In addition, a voluntary accelerated extrajudicial collateral enforcement mechanism is established for secured credit agreements between creditors and business borrowers. The objective of this AECE mechanism is to enable direct execution of collateral without the need to obtain an enforceable right through court systems. For consumer protection purposes, retail customers are excluded from the scope of the AECE mechanism.

    The Commission intends the proposed Directive to apply from January 1, 2021. It is proposed that the Directive would only apply to transfers of credit agreements that take place six months after the transposition deadline and therefore some parts would only apply from July 1, 2021.

    Feedback on both of the legislative proposals can be provided to the Commission by May 22, 2018, using the links below. The legislative proposals will now proceed through the EU legislative process and are therefore subject to change before they are published in the Official Journal of the European Union. The Commission is urging the co-legislators to finalize the proposals swiftly to support the ongoing efforts to reduce risk in the EU banking sector.

    View the proposed Regulation on minimum loss coverage for non-performing exposures.

    View the consultation webpage on the proposed amendments to CRR.

    View the proposed Directive on credit services, credit purchasers and the recovery of collateral.

    View the consultation webpage on the proposed Directive.

    View the AMC Blueprint.

    View the Commission’s Communication.