EU Approves European Council Proposal for NPL Recovery from Collateral
EU ambassadors approved the position of European Council on a proposed directive for a common framework and minimum requirements for out-of-court mechanism to recover the value from loans guaranteed with collateral in case the borrower is not able to pay it back. The proposed new mechanism for out-of-court accelerated collateral enforcement would have to be agreed between a credit institution and a borrower upfront, normally when the loan is granted. Effective out-of-court enforcement can help prevent the accumulation of non-performing loans (NPLs), as it provides banks with legal instruments to recover collateral more quickly.
The proposed new mechanism would only be available for business loans. Consumer loans would be excluded, as would loans for which the borrower's primary residence is used as collateral. Where this new mechanism has been agreed between the parties and if the borrower defaults on the loan, the collateral would be valued and either sold (by private sale or public auction) or appropriated (via a transfer of ownership to the creditor). The proceeds up until the outstanding sum would then be turned over to the creditor. The proposed rules aim to balance the creditor's and the borrower's interests in various ways, including the following:
- The creditor needs to give the borrower a certain amount of time to make the due payments and avert enforcement.
- The borrower has the right to go to court to challenge the enforcement or creditor’s right to enforce the collateral.
- The creditor only gets to keep the proceeds to the extent necessary to cover the outstanding amounts on the loan. Excess proceeds are paid out to the borrower or other creditors.
- Member states may decide that where proceeds from the collateral fall short of the outstanding amount on the loan, the loan shall nevertheless be considered as fully settled.
The original proposal for the directive by EC also included a part on the development of secondary markets for NPLs. The European Council reached a position on this part already on March 27, 2019. Negotiations with the European Parliament can proceed as soon as the Parliament has agreed its stance. The proposal states that the directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
Related Links
- European Council Press Release
- Proposal on Collateral Enforcement Mechanism (PDF)
- EC Press Release
- Overview of NPLs
Effective Date: OJ+20 Days
Keywords: Europe, EU, Banking, NPLs, Collateral Enforcement Mechanism, Minimum Requirements Credit Risk, EC, European Council
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
FSC Publishes an Update on Regulatory Sandbox InitiativeRelated Articles
HKMA Sets Out Regulatory Treatment for Personal Loan Guarantee Scheme
HKMA has published a circular that sets out the regulatory and reporting treatment for loans that participating authorized institutions may grant to eligible borrowers under the 100% Personal Loan Guarantee Scheme.
ECB Completes Targeted Review of Internal Models of Banks
ECB published the results of the assessment of internal models that banks use to calculate risk-weighted assets for credit, market, and counterparty credit risks.
PRA on Regulatory Treatment of Loans Under Mortgage Guarantee Scheme
PRA published a statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme, or MGS.
FCA Consults on Rules and Reporting Forms for Investment Firms Regime
FCA is consulting, via CP21/7, on the second phase of proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR).
HMT and BoE Decide to Explore Central Bank Digital Currency in UK
HM Treasury and BoE announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential central bank digital currency in UK.
EIOPA Sets Out Expectations on Use of Climate Risk Scenarios in ORSA
EIOPA published an opinion to set out its expectations on the supervision of the integration of climate change risk scenarios by insurers in their Own Risk and Solvency Assessment (ORSA).
Bundesbank Updates AnaCredit Reporting Requirements
Bundesbank published two circulars on AnaCredit reporting requirements. Circular 27/2021 covers changes to the reporting of branches, additional attributes to be reported for investment funds from August 01, 2021, and updates to the list of international organizations.
EC Sets Out Standards for MREL Reporting by Competent Authorities
EC published the Implementing Regulation 2021/622 that lays down implementing technical standards for reporting of the minimum requirement for own funds and eligible liabilities (MREL).
BCBS to Advance Work on Suptech, Climate Risk, and Basel Monitoring
BCBS has set out the strategic work priorities, as part of its the work program for 2021-22.
PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
