Publication - Guidance to banks on
non-performing loans
Introduction Context of this guidance A number of banks in Member States across the Euro area are currently experiencing high levels of non-performing loans (NPLs), as shown in Figure 1. There is broad consensus on the view that high NPL levels ultimately have a negative impact on bank lending to the economy1 , as a result of the balance sheet, profitability, and capital constraints faced by banks with high NPL levels.
The deliberate and sustainable reduction of NPLs in banks’ balance sheets is beneficial to the economy from both a microprudential and a macroprudential perspective. At the same time, it is acknowledged that economic recovery is also an important enabler of NPL resolution.
Addressing asset quality issues is one of the key priorities for European Central Bank (ECB) banking supervision. The ECB’s focus on this issue began with the 2014 comprehensive assessment, which comprised two main pillars – an asset quality review and a stress test. Subsequent to the comprehensive assessment, ECB banking supervision continued to intensify its supervisory work on NPLs. In the context of on-going supervisory engagement, the joint supervisory teams (JSTs) have observed varying approaches by banks to the identification, measurement, management and write-off of NPLs. In this regard, in July 2015 a high-level group on non-performing loans (comprising staff from the ECB and national competent authorities) was mandated by the Supervisory Board of the ECB to develop a consistent supervisory approach to NPLs.
Furthermore, in its supervisory priorities, ECB banking supervision has highlighted credit risk and heightened levels of non-performing loans as key risks facing euro area banks.
Through the work of the high-level group, ECB banking supervision has identified a number of best practices that it deems useful to set out in this public guidance document. These practices are intended to constitute ECB banking supervision's supervisory expectation from now on.
This guidance contains predominantly qualitative elements. The intention is to extend the scope of the guidance based on the continuous monitoring of developments concerning NPLs. As a next step in this regard, the ECB plans to place a stronger focus on enhancing the timeliness of provisions and write-offs.
While it is acknowledged that addressing non-performing loans will take some time and will require a medium-term focus, the principles identified will also serve as a basic framework for conducting the supervisory evaluation of banks in this specific area. As part of their ongoing supervisory work, the JSTs will engage with banks regarding the implementation of this guidance. It is expected that banks will apply the guidance proportionately and with appropriate urgency, in line with the scale and severity of the NPL challenges they face.
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Tel.: +49 69 1344 7455, E-mail: media@ecb.europa.eu
Website: www.ecb.europa.eu
page source https://www.bankingsupervision.europa.eu/
