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July 11, 2018

ECB announced further steps in its supervisory approach for addressing the stock of non-performing loans (NPLs) in the euro area. ECB will address the stock of NPLs by setting bank-specific supervisory expectations for the provisioning of NPLs.

The approach follows the work that has already been undertaken in this area, namely the banks’ NPL reduction strategies and the addendum for provisioning for new NPLs. It creates a consistent framework to address the stock of NPLs as part of the supervisory dialog through bank-specific supervisory expectations. Under this approach, ECB Banking Supervision will further engage with each bank to define its supervisory expectations. The bank-specific supervisory expectations are based on a benchmarking of comparable banks and guided by individual banks’ current NPL ratio and main financial features. The aim is to ensure continued progress to reduce legacy risks in the euro area and achieve the same coverage of the stock and flow of NPLs over the medium term. The approach is aimed at achieving adequate provisioning of legacy NPLs, thus contributing to the resilience of the euro area banking system.

The decision follows a number of steps taken by ECB to address the high levels of NPLs in the euro area. In March 2017, ECB Banking Supervision published guidance to banks on NPLs, which provided an effective toolkit for banks when tackling NPLs. As part of the guidance, high NPL banks were required to agree strategies to address NPL stocks. In March 2018, ECB Banking Supervision published an addendum to this guidance that set out supervisory expectations for the provisioning of new NPLs. The work so far has led to significant progress in reducing NPLs, with the NPL ratio of significant institutions decreasing from 8% in 2014 to 4.9% in the fourth quarter of 2017. Nevertheless, the current aggregate level of NPLs remain far too high compared to international standards and further efforts are necessary to ensure that the NPL issue in the euro area is adequately addressed.

 

Related Link: Press Release

Keywords: Europe, EU, Banking, NPLs, Banking Supervision, Supervisory Approach, ECB

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