On Wednesday 14 March, the European Commission presented a raft of ambitious measures to reduce the existing stock of non-performing loans (NPL) and prevent them building up in the European banking sector in the future.
“With today’s package, we have provided more risk reduction measures than the Council initially set out in its 2016 roadmap on completing Banking Union”, European Commissioner Valdis Dombrovskis told a press conference. He has high hopes that this package will form the basis for a balanced agreement to move forward on Banking Union, with a view to the European summit of June.
Alongside these legislative proposals, the Commission also presented its second progress report on reducing NPL in the EU, which confirms the downwind tendency observed in the previous report, from January (see EUROPE 11942).
The latest data also indicate that the ratio of non-performing loans fell to 4.4% in the third quarter of 2017, from 4.6% in the second quarter. The provisioning ratio remained stable, standing at 50.7% in the third quarter 2017. However, the Commission stresses that the variations in NPL ratios across the EU, from 0.7% to 46.7%, and the slow speed of progress in certain member states (Cyprus, Greece and Portugal, amongst others), are still causes for concern (see text: http://bit.ly/2FRReRC ).
New bank provisioning requirements
“Prevention is better than cure”, Dombrovskis stressed. He presented the proposed regulation modifying the regulation on capital requirements (CRR) by bringing in common minimum cover thresholds for newly-issued loans that become non-performing.
This prudential treatment would serve as a backstop directly applicable to all EU banks, in order to slow the rate of accumulation of loans becoming non-performing without sufficient cover for the losses. Should a bank fail to reach the minimum threshold applicable, deductions would apply to its equity.
For this, the Commission is introducing a common definition of non-performing exposure (NPE), corresponding to the one already used for prudential supervisory purposes. A loan is deemed non-performing when the borrower is unable to honour repayments, of either interest or capital. Once the payment delay exceeds 90 days or seems unlikely, the loan in question is classed as non-performing.
Under the proposal, the minimum cover requirement will increase progressively, depending on how long an exposure has been classed as non-performing. According to the Commission, this gradual increase reflects the fact that the longer an exposure is classed as non-performing, the lower the likelihood of recovering the amount owed.
Different cover requirements will apply depending on whether the NPL are classed as ‘unsecured’ or ‘secured’.
In general, secured NPL carry fewer risks than unsecured NPL, for which no assets have been provided as collateral, the Commission explains. For secured NPL, therefore, it is only if the bank has been unable to recover the guarantee after eight years that it is required to cover the losses made in full. For unsecured NPL, the maximum cover level will apply from the second year.
This new prudential treatment will apply only to loans taken out after 14 March 2018, subject to future modifications by the co-legislators.
The Commission was considering several effective dates, but finally decided that there would have been enough publicity by the day on which the proposal is adopted to allow borrowers and banks to make enlightened decisions, a European official explained.
The Association for Financial Markets in Europe (AFME) has already expressed concern at this measure. In a press release, it argues that the appropriate level of provisioning of non-performing loans should be determined bank-by-bank, in agreement with the supervisory authorities, rather than by the forcible application of one-size-fits-all Pillar 1 backstops. (See draft regulation: http://bit.ly/2tPcx1m ).
A European passport to develop the secondary markets
On Wednesday, the Commission also presented a draft directive that aims to promote the development of the secondary NPL markets. The proposal brings in common standards on accreditation and supervision at EU level.
This means that providers respecting these provisions will be able to operate throughout the EU without having to comply with specific accreditation conditions at the level of the member states (‘passporting’).
In countries with a high stock of NPL, these measures could help to increase the sales of NPL by up to 15% a year, Dombrovskis said.
The text provides for a whole range of protections. Purchasers of bank loans will also have to notify their acquisitions of loans to the authorities and comply with the rights and obligations of the initial loan agreement.
Furthermore, purchasers of loans to consumers established in a third country will be required to use credit managers accredited in the EU.
Accelerated Extrajudicial Collateral Enforcement mechanism
The directive also stipulates that banks will be able to agree with borrowers, when taking out the loan, on an accelerated procedure to recover the value of loans secured by collateral. In the event of the default of a borrower, the bank or other privileged creditor will be able to recover the collateral in a few months, without having to go to court.
However, the mechanism will be strictly ringfenced for loans to businesses and strictly governed. Consumer loans will be excluded from this procedure. (See proposed directive: http://bit.ly/2InOMAZ ).
Support for creation of ‘bad banks’
A detailed non-binding plan accompanies these proposals to help member states to create national portfolio management companies if they so wish, in full respect of European rules.
These portfolio management companies, or ‘bad banks’, will allow banks to shed their non-performing bank loans, which adversely affect their profitability.
During the banking crisis in Spain, the EU creditors insisted on the creation of a structure of this kind (Sareb) to manage the non-performing loans of Spanish banks (BFA-Bankia, Catalunya Banc, Banco de Valencia), which had been burdened by the real estate crisis.
In particular, the plan specifies possible structures for bad banks in receipt of public funding and a number of common principles for their creation, governance and operations. (See document: http://bit.ly/2FQmD7c ).
On Thursday, the European Central Bank will add to this raft of measures by publishing the final version of the highly controversial addendum to its guidelines, which also sets out provisioning requirements for loans newly classified as non-performing on the basis of the specific situation of the banks it supervises (see EUROPE 11956). (Original version in French by Marion Fontana)