ESRB published a report on resolving non-performing loans (NPLs). The report summarizes the NPL situation in the EU, followed by practical guidance on the process leading to NPL resolution, including a synopsis of the available options. Specific areas of interest include incentives for, and potential impediments to, the resolution of NPLs, policy experiences on asset management companies, and the conditions of secondary markets for distressed assets in the EU.
The report noted that the stock of NPLs in the EU banking sectors amounted to 5.1% of total loans at the end of 2016. The elevated NPL stock creates macro-prudential and financial stability issues. The report contains practical guidance for policymakers on the three steps that must be taken to design the overall response to the NPL issue. In the first step, a clear upfront diagnosis of the size and scope of the NPL problem should be made, followed by an operational separation of NPLs from other performing assets of the bank. In the second step, the NPLs of the concerned banks should be subject to valuation and triage, to identify the viable exposures—to be restructured—and the non-viable exposures, which would be liquidated. Additionally, an assessment of the viability of each individual bank following the resolution of their NPLs needs to be made. In the third and final step, the relevant NPLs should be removed from the banking system, whereby banks may need to be restructured, merged, or sold to facilitate their return to sustainable profitability.
The report outlines the practical aspects of NPL resolution, highlighting that a comprehensive policy response should be developed further to address the key aspects of this issue. Finally, the report offers specific policy proposals for a range of measures. In the medium term, the work should concentrate on structural issues to improve recoveries from NPLs. However, in the short term, the report recommends that micro-prudential authorities should strengthen their efforts to improve NPL management of banks by:
Enforcing compliance with the EU NPL definition and prudent measurement of NPLs
Requesting regular updates of NPL reduction strategies and setting targets for NPL reduction
Extending the adoption of good practices to all banks
Related Link: Report (PDF)
Keywords: Europe, ESRB, EU, NPL, Banking, Report
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.
EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.
EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).
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).
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.
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.