April 25, 2019

Regulation (EU) 2019/630, which amends the Capital Requirements Regulation, or CRR (Regulation 575/2013), with regard to the minimum loss coverage for non-performing exposures (NPEs), has been published in the Official Journal of the European Union. On the basis of a common definition of non-performing loans, the new rules would introduce a "prudential backstop," that is, a minimum loss coverage for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing. Regulation (EU) 2019/630 shall enter into force on the day following that of its publication in the Official Journal of the European Union.

CRR contains provisions directly applicable to institutions for determining their own funds. It is, therefore, necessary to complement the existing prudential rules in CRR relating to own funds with provisions requiring a deduction from own funds where NPEs are not sufficiently covered by provisions or other adjustments. Such requirement would effectively amount to creating a prudential backstop for NPEs that would apply uniformly to all institutions in the Union and would also cover institutions that are active on the secondary market. 

For applying the prudential backstop, it is appropriate to introduce in CRR a clear set of conditions for the classification of NPEs. As the Commission Implementing Regulation (EU) No 680/2014 already lays down criteria concerning NPEs for the purposes of supervisory reporting, it is appropriate that the classification of NPEs build on that existing framework. Implementing Regulation (EU) No 680/2014 refers to defaulted exposures as defined for the purpose of calculating own funds requirements for credit risk and impaired exposures pursuant to the applicable accounting framework. As forbearance measures might influence whether an exposure is classified as non-performing, the classification criteria are complemented by clear criteria on the impact of forbearance measures. It is, therefore appropriate, to provide that a forbearance measure granted to a NPE should not discontinue the classification of that exposure as non-performing unless certain strict discontinuation criteria are fulfilled. CRR has been amended as follows:

  • Point (m) has been added in Article 36(1).
  • Article 47a on NPEs, Article 47b on forbearance measures, and Article 47c on deduction for NPEs have been inserted. 
  • Also, Article 159 on Treatment of expected loss amounts and Article 469a on derogation from deductions from common equity tier (CET) 1 items for NPEs have been inserted. 

To facilitate a smooth transition toward the new prudential backstop, the new rules should not be applied in relation to exposures originated prior to April 26, 2019. Where competent authorities ascertain on a case-by-case basis that, despite the application of the prudential backstop for NPEs established by Regulation (EU) 2019/630, the NPEs of a specific institution are not sufficiently covered, it should be possible for them to make use of the supervisory powers provided for in the Capital Requirements Directive (CRD) IV, including the power to require institutions to apply a specific provisioning policy or treatment of assets in terms of own funds requirements. Therefore, it is possible, on a case-by-case basis, for the competent authorities to go beyond the requirements laid down in Regulation (EU) 2019/630 for the purpose of ensuring sufficient coverage for NPEs.

 

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Effective Date: April 26, 2019

Keywords: Europe, EU, Banking, NPLs, NPE, Prudential Backstops, CRR, NPL Regulation, CRD IV, Regulation 2019/630, EC

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