With various banking regulation and accounting changes (such as IFRS 9 and the ECB Guidance on NPLs) beginning to impact the treatment of non-performing loans (NPLs) from 1st January 2018, it is a time of significant change for NPL market participants.
The need to tackle the European banking sector's NPL problem is well established. NPL disposal (including securitisation) will inevitably be a key part of the strategy to resolve that problem. Aside from asset quality and the servicing environment, the other major factor that influences the pace and success of NPL sales is the quality of available information about the assets in question. The importance of complete data has been recognised by both the European Commission and the European Council, who asked and mandated the European Banking Authority (EBA) to issue templates for banks, specifying detailed information required from banks on their credit exposures.
In response, on 14th December 2017, the EBA published standard data templates for use in NPL transactions across the EU. There are two sets of templates: (1) the "EBA NPL portfolio screening" templates (which stratify the NPL portfolio using data fields that would typically form part of a market sounding exercise); and (2) the "EBA NPL transaction templates" (which provide granular and extensive data fields for various types of credit to enable a more detailed financial due diligence and valuation exercise).
Use of the templates is not a supervisory requirement but banks may adopt these on a voluntary basis as a means for parties in NPL transactions to have access to information at a level that would be helpful for screening, financial due diligence and valuation during NPL transactions. The templates are designed to become a market standard for NPL transactions.
The templates are built on existing reporting requirements (e.g. CRR), and take into account other work done in developing loan-level templates (e.g. the Securitisation Regulation STS regime), which should reduce the implementation costs and burden for banks.
It is hoped that an extended use of these templates will help investors and other stakeholders in NPL transactions by widening the investor base, lowering entry barriers to investors, improving the quality and availability of information, supporting price discovery and facilitating the development of the NPL secondary market.
The EBA has made clear that use of the templates will not supplant the need for tailored legal, accounting, tax and/or other professional advice in the context of each particular NPL transaction. In some jurisdictions (e.g. Ireland), much of the information contained in the templates may already frequently be provided as standard in loan sale transactions. Nevertheless, the use of standard forms and content has the potential to improve the efficiency and success of sale processes and provide greater predictability for all parties at all stages.