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November 30, 2017

Danièle Nouy, Chair of the ECB Supervisory Board, and Sharon Donnery, Chair of the ECB High Level Group on NPLs, spoke in Frankfurt about public consultation on the draft addendum to the ECB guidance to banks on non-performing loans (NPLs). They discussed the importance of resolving the issue of NPLs on bank balance sheets, along with the role of the ECB guidance in helping to resolve this issue.

Danièle Nouy on NPLs. She highlighted that NPLs weigh on balance sheets of banks, represent a drain on resources, and undermine trust in a bank. Speaking about the draft addendum to the ECB guidance on NPLs, she said: “Reducing the high stocks of NPLs is the first step. Banks must also ensure that the problem does not recur. And this forward-looking approach is supported by our draft addendum to the guidance. The draft addendum clarifies our supervisory expectations in respect of the provisioning of loans that become non-performing in the future.” However, the NPL issue needs to be addressed at other levels as well. For instance, significant differences exist between euro area countries when it comes to resolving NPLs in court. In some countries, such procedures take considerably longer than in others. National governments must address this by streamlining judicial systems and speeding up court procedures. In a Banking Union, there should be no significant differences in the time it takes to resolve NPLs in court. Out-of-court settlements should also become an instrument in resolving NPLs, added Ms. Nouy. She concludes that resolving the issue of NPLs requires a joint effort by banks, regulators, national governments, and EU institutions.

Sharon Donnery on NPLs. She explained the contents and purpose of the addendum to the ECB guidance on NPLs. She highlighted that the draft addendum is not a Pillar 2 measure; however, following supervisory dialog taking into account bank-specific circumstances, its implementation may result in individual Pillar 2 measures for certain banks. “ECB will give due consideration to a bank's position compared with its expectations, and in view of the specific circumstances of the bank. If, through this process, ECB still considers that bank's provisions do not adequately cover the credit risk, a supervisory measure under the Pillar 2 framework may be considered. However, if the ECB is satisfied with the explanations, no further action is proposed.” It can therefore be viewed as a three-stage process. First, as a transparent supervisor, ECB has clearly and consistently set out its supervisory expectations. Second, it will analyze bank-specific circumstances, strategies, governance and operations, recognition, accounting position, banks’ comments in the supervisory dialog, and so on, against these expectations. Third, this will be executed on a case-by-case basis and the results will be incorporated into bank-specific supervisory review and evaluation process (SREP) decisions.


Related Link: Speeches (PDF)

Keywords: Europe, EU, Banking, NPLs, Pillar 2, Addendum, SREP, ECB

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