October 31, 2018

EU ambassadors approved the position of the European Council on capital requirements applying to banks with non-performing loans (NPLs) on their balance sheets. Negotiations with the European Parliament can proceed as soon as the Parliament has agreed its stance. The new rules will apply only to loans allocated after the date of entry into force of the regulation.

The proposal, which was initially put forward by EC in March 2018, aims to create a prudential framework for banks to deal with the new NPLs and thus to reduce the risk of NPL accumulation in the future. It specifies requirements to set aside sufficient own resources when new loans become non-performing and creates appropriate incentives to address NPLs at an early stage. On the basis of a common definition of non-performing exposures, the proposed new rules introduce a prudential backstop—that is, common minimum loss coverage for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing. In case a bank does not meet the applicable minimum level, deductions from banks' own funds would apply.

According to the position of the European Council, different coverage requirements would apply, depending on the classifications of the NPLs as unsecured or secured and whether the collateral is movable or immovable:

  • Regarding NPLs secured by immovable collateral (commercial or residential real estate), it can be reasonably assumed that immovable property will have a remaining value for a longer period of time after the loan turned non-performing. Thus, the proposal provides a gradual increase of the minimum loss coverage level over a period of nine years. The full coverage of 100% for NPLs secured by movable and other Capital Requirements Regulations (CRR) eligible collateral will have to be built up after seven years.
  • Unsecured NPLs require higher and timelier minimum loss coverage because they are not backed by collateral. Therefore, the maximum coverage requirement would apply fully after three years.

 

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Keywords: Europe, EU, Banking, NPLs, Capital Requirements, CRR, European Parliament, Non performing Exposures, EC, European Council

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