On 10 November 2017, the European Commission launched a targeted consultation on minimum levels of capital for banks in the context of non-performing loans. This consolidation follows the Action Plan for Non-Performing Loans and is part of the general attempt to support a significant and sustainable reduction of NPL levels within the EU. The consultation is open until 30 November 2017.

Challenges ahead

The financial crisis and ensuing recessions have left some European countries with high levels of NPLs. The gross carrying amount of NPLs in the EU banking system amounted to about EUR 1 trillion or roughly 6.7 % of EU GDP (according to the Council).

November 2017 NPL Consultation

  • The November 2017 NPL Consultation seeks to gather stakeholders' views on the possible introduction of minimum levels of capital that banks should set aside to cover incurred and expected losses on newly originated loans that turn non-performing.
  • The Commission is seeking input on how such requirements can best be designed, with the goal of reducing new NPLs by ensuring sufficient loss coverage.
  • The topics addressed by the consultation inter alia include whether statutory prudential backstops should complement the improvements that the application of IFRS 9 is expected to bring with regards to loan loss provisioning. Another option would be to introduce statutory prudential backstops (as a Pillar 1 measure) that could complement the use of existing supervisory powers to address through institution-specific measures the (under) capitalisation of NPLs (as a Pillar 2 measure).
  • As announced in its Banking Union Communication and as a follow-up to the NPL Action Plan, the Commission is expected to adopt a comprehensive package of measures to address NPLs by spring 2018. In this context, the Commission will also consider introducing a common definition of non-performing exposures that would follow the definition already applicable in the context of supervisory reporting.

Recent development regarding NPLs

Next steps

  • ECB level The ECB public consultation on the draft addendum to the ECB guidance to banks on non-performing loans will be closed on 8 December 2017. A public hearing on these topics should be held on 30 November 2017.
  • EBA level In early 2018, EBA will launch an EU-wide stress test to be accompanied by a disclosure of detailed data on EU banks' balance sheets, covering their composition of capital, leverage ratios, RWAs by risk type, sovereign exposures, credit risk exposures and non-performing and forborne exposures.
  • The comprehensive NPL package is expected in spring 2018.

We will monitor these developments and provide updates on areas of interest until the end of this year and throughout 2018.