Featured Product

    EU Papers Examine NPL Resolution Strategy After Pandemic

    March 15, 2021

    European Parliament published two papers that discuss non-performing loan (NPL) resolution after the COVID-19 pandemic. One of the papers assesses the impact of COVID-19 on the European corporate and banking sectors and the extent to which lessons learned from the global financial crisis are applicable to the policies that should be put in place for NPL resolution after the pandemic. The paper assesses the potential consequences for NPL resolution on bank balance sheets after pandemic, analyzes the number of zombie firms that banks may still be lending to in EU, and raises some important policy considerations for how to manage the volume of NPLs that may accrue. The other paper examines policy implications of a potential surge in NPLs due to the COVID-19 pandemic; the paper provides an empirical assessment of potential scenarios and outlines lessons from previous crises for effective NPL treatment.

    The paper on policy implications highlights the importance of early and realistic assessment of loan losses to avoid adverse incentives for banks. Secondary loan markets would help in this process and further facilitate bank resolution as laid down in the Bank Recovery and Resolution Directive (BRRD), which should be uphold even in extreme scenarios. In the empirical analysis, the authors of the paper find that aggregated bank capital seems to be large enough to absorb potential NPL losses, even in an adverse scenario. However, relevant buffers above and beyond the minimum required capital may not always be sufficiently high. To find an effective and efficient strategy dealing with potentially high NPL levels in the future, the paper examined previous crises and established certain key lessons on NPL identification, recognition, and resolution that are all also likely to be of importance during the COVID-19 pandemic:

    • If NPLs are not identified and recognized efficiently, both in terms of speed and scope, NPL resolution effectiveness is undermined.
    • Regulators and supervisors should ensure that banks assess current loan values realistically, which can be achieved by effective Asset Quality Reviews, stress tests, adequate accounting rules (such as the new IFRS 9 standard), and inspections that impede banks masking their risk. Realistic loan value assessment will incentivize banks to recognize NPLs early and to handle NPLs efficiently, either by internal workouts or by selling them on secondary markets.
    • Forbearance or public bank recapitalization (and other state aid) are not well-suited to solve the NPL resolution problem efficiently, as they provide adverse incentives to banks.
    • European secondary market for NPLs has the potential to be an important component of a successful NPL resolution. Policy makers are well-advised to overcome existing obstacles hindering the development of these markets, such as information asymmetries between the seller and buyer and the banks’ lack of  incentives to sell loans at market prices.

    Regarding the EC Action Plan, the authors of the paper agree that a vitalization of the secondary loan market may be a promising step toward more resilient banking system. A liquid and transparent secondary loan market would allow banks to achieve higher prices when forced to sell NPLs, thus lowering their loss of capital even in critical times. A strong and well-developed secondary loan market, therefore, can contribute to the stability of the banking sector in an economy. Moreover, it can improve the loan-quality information that is available for investors and originators alike. Thus, the report notes that any plan to deal with NPLs should consider bank restructuring and resolution as the alternative, probably the preferred alternative, to recapitalization or any other rescue measure. 

     

    Related Links

    Keywords: Europe, EU, Banking, COVID-19, NPLs, Resolution Framework, BRRD, Systemic Risk, Credit Risk, Recovery and Resolution, Regulatory Capital, European Parliament

    Featured Experts
    Related Articles
    News

    APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness

    APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).

    December 02, 2021 WebPage Regulatory News
    News

    EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance

    The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).

    December 01, 2021 WebPage Regulatory News
    News

    FSB Sets Out Good Practices for Crisis Management Groups

    The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.

    November 30, 2021 WebPage Regulatory News
    News

    APRA Penalizes Heritage Bank for Incorrect Reporting of Capital

    The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Releases Annual Report 2021-2022

    The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Updates Timeline for Implementation of Certain Basel Rules

    Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.

    November 29, 2021 WebPage Regulatory News
    News

    EC Defers Adoption of Regulatory Standards for Disclosures Under SFDR

    EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.

    November 29, 2021 WebPage Regulatory News
    News

    FCA Releases MIFIDPRU Application Forms and Third Set of Rules on IFPR

    The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.

    November 29, 2021 WebPage Regulatory News
    News

    APRA Finalizes Capital Adequacy Standards for Banks

    The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.

    November 29, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.

    November 29, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7751