ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans. Mr. Enria assured that ECB is monitoring the evolution of nonperforming loan ratios very closely and encouraging banks to develop reliable and prudent projections of their asset quality under different scenarios. In response to a question, he clarified that the ECB Banking Supervision has not yet developed any official proposal on the creation of a European asset management company and submitted it to EC, SRB, or representatives of the German government.
In the letter, Mr. Enria noted that he has personally supported the idea of a European asset management company in the past and still thinks it has the potential to be a useful tool in the event of a significant system-wide deterioration in asset quality. Alternatively, he argued that a network of national asset management companies could also prove helpful in supporting a swifter economic recovery, if designed appropriately. He thinks that an integrated European response to such a problem would be preferable to a plethora of uncoordinated national initiatives. However, this was and remains a personal contribution to the policy debate, as the establishment of asset management companies, and the conditions for their compatibility with the EU legal environment, are outside the competencies of ECB. He also highlighted that EC has published a Communication detailing an action plan to tackle non-performing loans, which supports the establishment of EU network of asset management companies, among other things.
In answer to a question on the measures planned by ECB to reduce nonperforming loans in the euro area, he emphasized that addressing nonperforming loans has always been one of the key priorities for ECB Banking Supervision. One very important element of the ECB framework, which facilitates the timely resolution of nonperforming loans, is the ECB “Guidance to banks on non-performing loans,” which was published in March 2017 and expects banks with high levels of nonperforming loans to develop their own strategies to reduce such loans and to put adequate governance arrangements in place. Such nonperforming loan strategies, which are reviewed and updated by banks on an annual basis, are assessed and challenged by Joint Supervisory Teams, which also monitor their implementation on an ongoing basis. He added that, in response to the COVID-19 pandemic, ECB has sent letters to banks communicating its expectations in this respect. Banks also need to ensure that they have sufficient operational capacity to deal with distressed debtors in the context of the pandemic. This should enable banks to provide appropriate solutions to distressed debtors in a timely manner, helping to contain the build-up of problem assets at banks and to minimize and mitigate any cliff effects, where possible. In this regard, the Joint Supervisory Teams are engaging with banks on a case-by-case basis.
Related Link: Letter (PDF)
Keywords: Europe, EU, Banking, NPLs, COVID-19, Credit Risk, Asset Management Company, Asset Quality, ECB
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleEBA Finalizes Standards on Contractual Recognition of Stay Powers
BIS published a paper that provides an overview on the use of big data and machine learning in the central bank community.
APRA finalized the reporting standard ARS 115.0 on capital adequacy with respect to the standardized measurement approach to operational risk for authorized deposit-taking institutions in Australia.
ECB published a guide that outlines the principles and methods for calculating the penalties for regulatory breaches of prudential requirements by banks.
MAS and The Association of Banks in Singapore (ABS) jointly issued a paper that sets out good practices for the management of operational and other risks stemming from new work arrangements adopted by financial institutions amid the COVID-19 pandemic.
ACPR announced that a new data collection application, called DLPP (Datalake for Prudential), for collecting banking and insurance prudential data will go into production on April 12, 2021.
BCB announced that the Financial Stability Committee decided to maintain the countercyclical capital buffer (CCyB) for Brazil at 0%, at least until the end of 2021.
EIOPA has launched a European-wide comparative study on non-life underwriting risk in internal models, also kicking-off of the data collection phase.
SRB published an overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to financial market infrastructure services in resolution.
EBA is consulting on the implementing technical standards for Pillar 3 disclosures on environmental, social, and governance (ESG) risks, as set out in requirements under Article 449a of the Capital Requirements Regulation (CRR).
ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting