The proposal for a Regulation of the European Parliament and of the Council on amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures which was issued on 14th March 2018 is an important part of the work to strengthen Europe’s Economic and Monetary Union (EMU) and completing the Banking union.
The financial crisis and ensuing recessions have left many European banks with high levels of non-performing loans (NPLs), with significant adverse impacts on banks’ profitability and their ability to lend. Thus Council invited the Commission and other actors to take steps on several fronts to reduce the risk to financial stability, both by addressing the existing stock of NPLs and to prevent the future emergence and accumulation of NPLs.
Timely and adequate provisioning for NPLs is essential to ensure banks’ financial soundness and has proved to be crucial to effectively resolving NPLs in European and international experience. However, provisions recognised by banks for NPLs in accordance with the accounting framework are not necessarily adequate from a prudential perspective, which has a different scope, objective and purpose. IFRS 9 is expected to bring much closer alignment with the prudential standards than IAS 39, and to contribute to address the issue of delayed and inadequate provisions as it operates on an “expected loss” approach. However, the new standard still leaves room for discretion in the valuation of NPLs as well as of the underlying collaterals and, by consequence, in the determination of provisions.
In order to effectively address on a systematic and EU-wide basis the potential under-provisioning for new loans that become non-performing, the CRR amendment aims at exploring the possibility of creating a prudential framework applicable to EU banks for the treatment of new loans that become NPLs, which could complement actions to reduce levels of existing NPLs. The proposed Pillar 1 tool is based on definitions and concepts already used. The concept of non-performing exposures (NPE) introduced via this amendment is consistent with that in Commission Implementing Regulation (EU) No 680/2014 which is already commonly applied for supervisory reporting purposes. The NPE definition includes, among others, defaulted exposures as defined for the purposes of calculating own funds requirements for credit risk and exposures impaired pursuant to the applicable accounting framework. Moreover, the proposal (also in line with Regulation 680/2014) introduces strict criteria on the conditions to discontinue the treatment of an exposure as non-performing as well as on the regulatory consequences of refinancing and other forbearance actions.
The purpose of statutory prudential backstops is to prevent the build-up of future NPE with insufficient provision coverage by setting a common minimum provisioning level for NPE across Member States and banks. The current EU prudential framework does not provide for harmonised prudential treatment as regards NPEs. As a consequence, actual loss coverage for NPEs may vary across banks in different jurisdictions, even if they bear the same underlying risk.
The prudential backstop consists of two main elements:
The proposal sets out a harmonised treatment of NPEs for prudential purposes so as to ensure that all institutions in the EU have a minimum level of coverage for their NPEs-related risks. The applicable minimum coverage requirements take into account how long an exposure has been classified as non-performing, differentiate between unsecured and secured NPEs as well as between NPEs where the obligor is past due more than 90 days. The proposal thus aims to increase the comparability of capital ratios and their reliability, contributing to transparency and stability of financial markets.
The proposal is opened for public feedback from 14 March 2018 to 9 May 2018.
11-4-2018