ECB Letter Sets Out Strategies to Address Issue of Nonperforming Loans
ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans. Mr. Enria assured that ECB is monitoring the evolution of nonperforming loan ratios very closely and encouraging banks to develop reliable and prudent projections of their asset quality under different scenarios. In response to a question, he clarified that the ECB Banking Supervision has not yet developed any official proposal on the creation of a European asset management company and submitted it to EC, SRB, or representatives of the German government.
In the letter, Mr. Enria noted that he has personally supported the idea of a European asset management company in the past and still thinks it has the potential to be a useful tool in the event of a significant system-wide deterioration in asset quality. Alternatively, he argued that a network of national asset management companies could also prove helpful in supporting a swifter economic recovery, if designed appropriately. He thinks that an integrated European response to such a problem would be preferable to a plethora of uncoordinated national initiatives. However, this was and remains a personal contribution to the policy debate, as the establishment of asset management companies, and the conditions for their compatibility with the EU legal environment, are outside the competencies of ECB. He also highlighted that EC has published a Communication detailing an action plan to tackle non-performing loans, which supports the establishment of EU network of asset management companies, among other things.
In answer to a question on the measures planned by ECB to reduce nonperforming loans in the euro area, he emphasized that addressing nonperforming loans has always been one of the key priorities for ECB Banking Supervision. One very important element of the ECB framework, which facilitates the timely resolution of nonperforming loans, is the ECB “Guidance to banks on non-performing loans,” which was published in March 2017 and expects banks with high levels of nonperforming loans to develop their own strategies to reduce such loans and to put adequate governance arrangements in place. Such nonperforming loan strategies, which are reviewed and updated by banks on an annual basis, are assessed and challenged by Joint Supervisory Teams, which also monitor their implementation on an ongoing basis. He added that, in response to the COVID-19 pandemic, ECB has sent letters to banks communicating its expectations in this respect. Banks also need to ensure that they have sufficient operational capacity to deal with distressed debtors in the context of the pandemic. This should enable banks to provide appropriate solutions to distressed debtors in a timely manner, helping to contain the build-up of problem assets at banks and to minimize and mitigate any cliff effects, where possible. In this regard, the Joint Supervisory Teams are engaging with banks on a case-by-case basis.
Related Link: Letter (PDF)
Keywords: Europe, EU, Banking, NPLs, COVID-19, Credit Risk, Asset Management Company, Asset Quality, ECB
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