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March 14, 2018

EBA published its advice on the EC proposal for statutory prudential backstops on banks' provisioning practices for new loans that turn non-performing. EBA notes that the backstop complements the existing prudential set of measures and the new accounting provisions under IFRS9; this advice aims to provide some qualitative considerations as well as a conservative impact analysis of the proposed measures.

In its impact analysis, EBA provided some considerations about the design of the statutory prudential backstop as well as some quantitative evidence about the different specifications of the backstop. The report also includes a qualitative section, in which EBA considers the statutory prudential backstop from a supervisory perspective. This section focuses on the interaction of the backstop with the full set of available regulatory and supervisory measures, which are currently in place. It provides observations about the possible effects of prudential backstops, in combination with the existing CRR provisions, the Pillar 2 measures, and the newly introduced accounting provision under IFRS9.

Non-discretionary backstop requirements (that is, compulsory deductions from regulatory capital) can help incentivize banks to address NPLs proactively and prevent the future accumulation of NPLs on balance sheets. This report is EBA's response to EC's call for advice on the introduction of statutory prudential backstops proposed in its consultation document, which was published on November 10, 2017. This report complements EC’s legislative proposal, which was published on March 14, 2018.

 

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Keywords: Europe, EU, Banking, NPLs, Prudential Backstops, IFRS 9, EBA

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