European Council adopted a new framework for dealing with the bad loans of banks. The new rules set capital requirements applying to banks with non-performing loans (NPLs) on their balance sheets. The aim of the reform is to ensure that banks set aside sufficient own resources when new loans become non-performing and to create appropriate incentives to avoid the accumulation of NPLs. The regulation will enter into force on the day following its publication in the Official Journal of the European Union.
A bank loan is generally considered non-performing when more than 90 days pass without the borrower (a company or a physical person) paying the agreed installments or interest or when it becomes unlikely that the borrower will reimburse it. On the basis of a common definition of non-performing loans, the new rules would introduce a "prudential backstop," that is, common minimum loss coverage for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing.
Keywords: Europe, EU, Banking, NPLs, Credit Risk, Capital Requirements, Prudential Backstops, European Council
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