EC published a comprehensive action plan and the associated set of questions and answers (Q&A) to tackle the expected rise in non-performing loans (NPLs) on bank balance sheets, following the outbreak of the COVID-19 pandemic. The action plan is focused, among other elements, on the secondary markets for distressed assets, the establishment of national asset management companies, and the insolvency and debt recovery frameworks. EBA has welcomed the EC action plan, which requests the support of EBA to improve data quality and comparability, enhance transparency and market discipline under Pillar 3 rules, and address regulatory impediments to NPL purchases. EBA states that it will act swiftly to support these initiatives while continuing its wider regulatory and supervisory work on NPLs in EU.
EC had asked EBA to review the NPL data templates, which were published in December 2017, to reassess the criticality of data fields and to make them more user-friendly for the financial due diligence and for the valuation of NPL transactions. The NPL data templates are a central element of the action plan, which also includes initiatives such as EU guidance on best-execution NPL sales process, organization of asset management companies, and a European data hub. Throughout the review process of the NPL data templates, EBA will closely engage with relevant market participants and then publish a discussion paper on the revised data templates in the second quarter of 2021. In addition, EBA will also work to specify the appropriate regulatory treatment of "sold NPL loans." To give member states and the financial sector the necessary tools to address a rise in NPLs in the banking sector early on, EC is proposing a series of actions with the following four key goals:
- Further develop secondary markets for distressed assets—This will allow banks to move NPLs off their balance sheets, while ensuring further strengthened protection for debtors. A key step in this process would be the adoption of the proposal of EC on credit servicers and credit purchasers which is being discussed by the European Parliament and the Council. These rules would reinforce debtor protection on secondary markets. EC sees merit in the establishment of a central electronic data hub at EU level to enhance market transparency. Such a hub would act as a data repository underpinning the NPL market to allow a better exchange of information between all actors involved so that NPLs are dealt with in an effective manner. On the basis of a public consultation, EC would explore several alternatives for establishing a data hub at European level and determine the best way forward. One of the options could be to establish the data hub by extending the remit of the existing European Data Warehouse.
- Reform corporate insolvency and debt recovery legislation in EU—This will help converge the various insolvency frameworks across EU, while maintaining high standards of consumer protection. EC urges the Parliament and Council to reach an agreement swiftly on the legislative proposal for minimum harmonization rules on accelerated extrajudicial collateral enforcement, which the EC proposed in 2018.
- Support establishment of and cooperation among national asset management companies at EU level—EC stands ready to support member states in setting up national asset management companies and would explore how cooperation could be fostered by establishing an EU network of national asset management companies. While national asset management companies are valuable because they benefit from domestic expertise, an EU network of national asset management companies could enable national entities to exchange best practices, enforce data and transparency standards, and better coordinate actions. Accessing information on NPL markets will require that all relevant data protection rules regarding debtors are respected.
- Implement precautionary measures—Given the special circumstances of the current health crisis, authorities have the possibility to implement precautionary public-support measures, where needed, to ensure the continued funding of the real economy under the Bank Recovery and Resolution Directive (BRRD) and State aid frameworks.
Keywords: Europe, EU, Banking, NPLs, COVID-19, Credit Risk, Reporting, Pillar 3, BRRD, NPL Template, Action Plan, EBA, EC
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleEC Amends Rule to Extend Temporary Exemption to Apply IFRS 9
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.