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.
Effective Date: April 26, 2019
Keywords: Europe, EU, Banking, NPLs, NPE, Prudential Backstops, CRR, NPL Regulation, CRD IV, Regulation 2019/630, EC
Previous ArticleSEC Statement Highlights Risks to Consider During LIBOR Transition
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.
The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.
The European Banking Authority (EBA) published a methodological guide to mystery shopping.
The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.
The European Securities and Markets Authority (ESMA) has responded to the IFRS consultation on targeted amendments to the IFRS Foundation constitution to accommodate an International Sustainability Standards Board (ISSB) to set IFRS Sustainability Standards.