In a response to the questions posed by a member of the European Parliament, Andrea Enria of the European Central Bank (ECB) explained how ECB assesses nonperforming loan (NPL) reduction strategies of banks within its prudential supervision mandate. The ECB Chair notes that NPLs continue to be a supervisory priority for ECB since the inception of European banking supervision in 2014. ECB expects banks with elevated NPL levels to come up with an action plan, follows up on the implementation of such a plan through off- and on-site inspections, and discusses with a bank how the bank will address the findings of on-site inspection.
The supervisory measures of ECB aim to ensure that banks actively address NPLs, which in turn helps to protect the safety and soundness of the European banking system. ECB regularly asks banks with elevated levels of NPLs to provide it with their plans to reduce their NPLs and foreclosed assets and it then follows up on the implementation of these plans. The ECB can assess NPL-reduction strategies and their implementation through off-site and on-site supervision. The on-site supervision can take the form of on-site inspections of specific portfolios covered by a bank’s NPL reduction strategy, which can include NPLs and foreclosed assets. ECB Banking Supervision cannot assess issues beyond its prudential mandate, such as matters pertaining to the European competition law. In addition, the assessment of NPL transactions of a bank can only focus on actual transactions. In their NPL reduction plans, banks often inform ECB about the assets that will be included in the implementation of the reduction strategy. It is not uncommon for banks to plan for and then execute sales of NPLs at prices below the current book values. In the ECB experience, banks often conduct such sales by inviting possible investors to make offers. Based on an assessment of the impact of the matter on the risk profile of a bank, ECB can decide to carry out an on-site inspection covering specific areas that it deems relevant. Findings identified in the on-site inspection are discussed with the bank and shared in a written report. ECB then expects the bank to provide an action plan setting out how it will address the findings.
Related Link: ECB Letter (PDF)
Keywords: Europe, EU, Banking, Credit Risk, NPL Reduction Strategies, Basel, COVID-19, NPLs, Banking Supervision, On-Site Inspections, Action Plan, ECB
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