ESRB published a report on macro-prudential approaches to non-performing loans (NPLs). The report focuses on the role that macro-prudential policy can play in preventing system-wide increases in NPLs and in strengthening bank resilience to such increases. It identifies the main triggers, vulnerabilities, and amplifiers that can drive system-wide increases of NPLs, drawing on the experience of ESRB members, especially those from member states in which such increases were observed in the aftermath of the recent crisis.
The report presents an analysis performed by ESRB in response to a request from the Council of the European Union to "develop macro-prudential approaches to prevent the emergence of system-wide NPL problems, while taking due consideration of procyclical effects of measures addressing NPLs’ stocks and potential effects on financial stability.” The report not only highlights the business cycle and asset price shocks as two of the main drivers, but also acknowledges the role played by vulnerabilities built up before the crisis—such as excessive credit growth, high indebtedness, and banking practices—and structural factors such as weaknesses in the legal and judicial system.
In terms of macro-prudential policy approaches, the report concludes that while no fundamental changes to the existing macro-prudential toolkit seem to be required, some refinements should be considered. Further work is needed in areas such as the use of sectoral capital buffers and the development of borrower-based measures (for both households and non-financial corporations). Capital-based instruments should also be considered to address vulnerabilities that could later result in system-wide increases in NPLs. Moreover, the macro-prudential authorities should develop early warning systems to monitor the risks of credit portfolio deterioration from a macro-prudential perspective. Finally, some of the triggers of system-wide NPL problems fall outside the scope of macro-prudential policy, notably the legal and judicial framework as well as banks’ governance structures. Nevertheless, they determine the circumstances in which any macro-prudential policy approach will have to be developed, and, as such, deserve consideration in designing macro-prudential approaches to NPLs.
Keywords: Europe, EU, Banking, NPLs, Systemic Risk, Macro-prudential Policy, ESRB
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
APRA is consulting on updates to ARS 210.0, the reporting standard that sets out requirements for provision of information on liquidity and funding of an authorized deposit-taking institution.
FED released hypothetical scenarios for a second round of stress tests for banks.
FED is proposing to temporarily revise the capital assessments and stress testing reports (FR Y-14A/Q/M) to implement the changes necessary to conduct stressed analysis in connection with the re-submission of capital plans, using data as of June 30, 2020.
FED adopted a proposal to extend for three years, with revision, the information collection under the market risk capital rule (FR 4201; OMB No. 7100-0314).
EBA published a voluntary online survey seeking input from credit institutions on their practices and future plans for Pillar 3 disclosures on the environmental, social, and governance (ESG) risks.