On Thursday 18 January, the European Commission presented a first positive progress report on the action plan to tackle non-performing loans (NPL), which was adopted by the member states in July of last year (see EUROPE 11827).
“The sun is up and the fog is lifting”, an optimistic European Financial Services Commissioner, Valdis Dombrovskis, told the press. He said that the concrete efforts made by banks, the supervisory authorities, the member states and the Commission were paying off.
The report, which was adopted in the form of a communication accompanied by a working document, shows that the positive trend of falling NPL ratios and growing coverage ratios has solidified and continued into the second half of 2017.
Considerable gaps between member states
The legacy of the financial crisis, NPL are defined as loans for which the repayment deadlines have been exceeded by 90 days. According to the report, the overall NPL ratio in the EU fell to 4.6% in the second half of 2017, representing a drop of around one percentage point on an annual basis and of one third since the fourth quarter of 2014. However, the total volume of NPL in the EU is still at a level of €950 billion, which is considerably above pre-crisis levels.
In its communication, the Commission states that NPL ratios have fallen in almost all member states, although the differences remain considerable: the banking sectors of nine-member states had ratios of more than 10% at the end of the second quarter of 2017 whilst in 10 others, the ratios were less than 3%.
The working document accompanying the communication details evolutions in seven-member states (Spain, Portugal, Cyprus, Greece, Ireland, Italy and Slovenia), selected due to their NPL ratios, but also their positive developments, which may serve as an example to other member states, the Commission explains.
In terms of progress, Italy is an excellent example, said Commissioner Dombrovskis. The NPL ratio of the banking sector has fallen from 16.2% in June 2016 to 12.2% in June 2017. The data reflect considerable sales and securitisations of NPL, partly due to the participation of the Italian recovery fund, which have already had effects on banks’ balance sheets, the document states.
In Greece, on the other hand, the drop is more modest, with a fall of just 0.6% over the same period. NPL from the private sector have even increased slightly. According to the Commission, this could be explained by the late implementation of the requirements of the third financial assistance programme.
This downwards trend has been confirmed by the European Banking Authority, which also published a health check of NPL in the EU on Wednesday (see EUROPE 11940). It is worth noting that the Commission used not the EBA data but those of the European Central Bank, which are based on a broader sample of banks, to compile its report, a European official told us.
Progress in the implementation of the action plan
The report also shows that the EU is on the right track in the implementation of the Council’s action plan, which should allow it to maintain this positive trajectory.
Readers may recall that in its communication of October 2017 on the completion of Banking Union (see EUROPE 11878), the Commission announced that in March 2018, it would present a raft of measures to continue the reduction of the existing stock, but also to prevent new NPL from appearing in the future.
As for the drafting of the reference document setting out common principles for the creation, at national level, of asset management companies, this is in its finishing stages, the Commission said.
Public consultations on possible measures to stimulate the secondary NPL markets and improve the protection of secured creditors have been carried out, it reports, and impact assessments are in progress. On the latter initiative, it said that it may present a proposal outlining a framework to create a fast-track mechanism for the extra-judicial execution of guarantees for NPL.
The Commission is also expected to present a proposal bringing in minimum standards on bank provisioning, to modify the capital requirements regulation (CRR). Such prudential treatment would serve as a backstop, directly applicable to all EU banks so as to slow the accumulation of loans becoming non-performing without sufficient loss coverage, the document states.
However, the initiative would apply only to loans newly classified as non-performing, Dombrovskis confirmed. The Commission has still to specify the exact date on which these requirements will apply. In a document put forward the public consultation in November 2017, four options were under consideration: the publication date of the consultative document, the publication date of the legislative proposal, the date of entry into force of the proposal or a later application date.
In this context, the Commission is moreover considering bringing in a common definition of non-performing exposures, in line with the one already used for prudential supervisory purposes.
On Tuesday of next week, the Commission will present this first progress report to the European finance ministers. A second report is expected in March 2018. (Original version in French by Marion Fontana)