July 16, 2018

ECB published its opinion on the proposal for the regulation on amending Capital Requirements Regulation or CRR (EU Regulation No 575/2013) with respect to minimum loss coverage for non-performing exposures (NPEs). ECB supports the proposed regulation, which is part of the EC’s package of measures to deal with NPEs in EU.

ECB, in April 2018, had received requests from the European Parliament and the Council of the European Union, respectively, for an opinion on the proposed regulation. The proposed regulation is expected to address the possible risks arising from the build-up of insufficiently provisioned NPEs in the future. The proposed regulation is also an important part of the EU efforts to further reduce risks in the banking system. Following are the key observations of the ECB opinion on the proposed regulation:

  • ECB welcomes the clarification in the proposed regulation that the prudential backstop for NPEs, which is established by the proposed regulation, does not prevent competent authorities from exercising their supervisory powers in accordance with applicable law. More specifically, despite the application of this prudential backstop, ECB may, on a case-by-case basis, determine that the NPEs of a specific credit institution are not sufficiently covered and use its supervisory powers under the Pillar 2 framework
  • ECB welcomes the fact that the definition of an NPE includes all types of NPEs, in particular retail exposures.
  • To determine the applicable amount of insufficient coverage for NPEs to be deducted from common equity tier (CET) 1 items, institutions are required to multiply their NPEs by the applicable factor specified in the proposed regulation. ECB supports calibration of the applicable factors under the proposed regulation.
  • ECB understands that the relevant supervisory reporting requirements specified under Implementing Regulation (EU) No 680/2014 will be amended to the effect that competent authorities will be able to monitor institutions’ compliance with the proposed regulation. Furthermore, ECB invites EC to consider whether a disclosure requirement with regard to institutions’ compliance with the minimum coverage requirement should be introduced in CRR.

 

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Keywords: Europe, EU, Banking, Non-Performing Exposures, NPLs, CRR, Pillar 2, CET1, EC, ECB

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