On Thursday 15 March, the European Central Bank published the highly anticipated final version of its addendum to its guidelines 20 March 2017, which sets out its prudential expectations for banks concerning new non-performing loans (NPL).
Essentially, the new text expresses the expectation that from 1 April 2018 onwards, new unsecured NPL will be completely covered two years after the date on which they are classified NPL. For new secured NPL, a degree of provisioning is expected three years after classification as ‘non-performing’, which should then increase up to year seven.
This non-binding document will therefore serve as a basis for the prudential dialogue between the ECB and each bank. Only after this dialogue, and depending on the specific situation of each bank, will the ECB decide, on a case-by-case basis, whether or not to take prudential measures, it stresses. Furthermore, the ECB will carry out assessments at least once a year into possible gaps between banks’ practices and prudential provisioning expectations.
Clear distinction between ‘Pillar I’ and ‘Pillar II’ measures
Presenting the package of legislative proposals (‘Pillar I’) on NPL on Wednesday (see EUROPE 11981), European Commissioner for Financial Services Valdis Dombrovskis stressed the distinction between the work of the ECB on a case-by-case approach (‘Pillar II’).
Along the same lines, the monetary institute reiterated that pursuant to the directive on capital requirements (CRD IV), the supervisory authorities are required to assess and deal with specific risks of the various banks not already covered, or not sufficiently covered, by the rules of Pillar I.
Like the Commission's, the ECB's prudential expectations take account of how long the NPL has been classed as ‘non-performing’ and whether the loan is secured. However, there are still a few noteworthy differences.
First of all, the Commission proposes that secured NPL be fully covered after eight years, whereas the ECB proposes a period of seven years. Additionally, the ECB wants secured loans classed as NPL on 1 March 2018 to be provisioned at a level of at least 40% up to May 2021, before being fully provisioned by May 2025. In its legislative proposal, the Commission proposes provisioning of 17.5% in the third year.
In justification, the ECB explains that the Commission’s minimum coverage levels have been calibrated to the average risk. However, as the ECB has a mandate to assess risks beyond those already covered by these minimum requirements, the calibration automatically has to be different.
A number of changes have been brought in, with the aim of responding to the deluge of criticism attracted by the draft text presented in October of last year (see EUROPE 11876), which led to an explanatory campaign on the part of the ECB (see EUROPE 11956, 11948, 11904).
In particular, the ECB has decided to delay the date of application, initially scheduled for 1 January 2018, until April. It is also worth noting that the ECB is now talking in terms of prudential expectations, whereas its previous version referred to prudential mechanisms.
During the presentation of the addendum, Sharon Donnery, the chair of the ECB’s high-level group on NPL, said that the final version responded to the concerns set out in the opinions of the legal services of the European Parliament (see EUROPE 11901) and Council of the EU (see EUROPE 11913). Both legal services found that the ECB had overstepped its mandate.
Initial reactions are along similar lines. “A first read of the addendum appears to show that the Banking Supervision has taken into account the concerns expressed by the European Parliament, making the non-binding nature of the addendum and its application on a case-by-case basis more clear”, European Parliament President Antonio Tajani stated in a press release. However, the legal services of the Parliament will need longer to go through the text with a fine-toothed comb (http://bit.ly/2tOemf3 ). (Original version in French by Marion Fontana)