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October 31, 2018

EBA publishes the final guidelines on the management of non-performing and forborne exposures in EU. The guidelines require institutions to establish non-performing exposures (NPE) reduction strategies and introduce governance and operational requirements to support them. The guidelines apply from June 30, 2019.

The guidelines specify sound risk management practices for credit institutions in their management of NPEs and forborne exposures (FBEs), including requirements on NPE reduction strategies, governance and operations of NPE workout framework, internal control framework, and monitoring. The guidelines are written from a prudential perspective, but are also mindful of the pressing needs related to consumer protection to ensure that consumers are treated fairly. The guidelines also set out requirements for processes to recognize NPEs and FBEs, in addition to a forbearance granting process with a focus on the viability of forbearance measures. The guidelines specify that institutions should grant forbearance measures only with the view to return the borrower to a sustainable performing repayment status and are thus in the interest of the borrower. Finally, the guidelines outline requirements for competent authorities' assessment of credit institutions' NPE management activity as part of the Supervisory Review and Evaluation Process.

The guidelines introduce a threshold of 5% of gross NPL ratio as a trigger for developing NPE strategies and applying associated governance and operational arrangements. This threshold does not indicate an optimal level for NPLs and should not be considered as an automatic target to be used in the NPE strategies of credit institutions but sets a prudential framework for stricter supervisory monitoring to guard against the rising levels of NPEs. The guidelines, which are addressed to credit institutions and supervisors, take into account the proportionality aspects in their implementation and, where applicable, provide concrete examples in relation to small and less complex institutions. 

The guidelines have been developed in accordance with the European Council Action Plan; they aim to ensure that credit institutions have adequate prudential tools and frameworks in place to effectively manage their NPEs and to achieve a sustainable reduction on their balance sheets. The guidelines also contain a summary of the responses received to the consultation on these guidelines, along the EBA analysis of these responses and the resulting amendments to the proposals.

 

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Effective Date: June 30, 2019

Keywords: Europe, EU, Banking, Guidelines, Non-performing Exposures, Forborne Exposures, SREP, NPLs, Proportionality, EBA

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