Representatives of the European Parliament and the Austrian Presidency of the Council of the European Union on Tuesday 18 December marked an interinstitutional agreement on the proposal for a regulation introducing common minimum coverage thresholds applied to banks with non-performing loans (NPLs) on their balance sheets (see EUROPE 12154).
As the Council wanted, these rules will be applicable after the entry into force of the future regulation, whereas the European Commission recommended March 2018, at the time the legislative proposal was submitted
The legislative proposal sets a timetable for banks to set aside sufficient own resources for losses they would incur if a bank loan, issued after the application of the future rules, becomes non-performing (or will probably be one).
A bank loan is considered non-performing when the repayment due date is not met after 90 days.
Under the terms of the interinstitutional agreement to be confirmed by the Parliament and the Council, a distinction is made between a loan secured by certain assets and an unsecured loan.
The time limit for 100% full coverage will be three years for unsecured loans. As the Council wanted, coverage will be progressive (0% after 1 year, 35% after 2 years, 100% after 3 years), while the Parliament called for zero coverage for the first two years and full coverage for the third year.
For guaranteed loans, NPL loss coverage will increase as follows: 0% after two years, 25% after three years, 35% after four years, 55% after five years.
After the fifth year, a distinction will again be made between a loan guaranteed by securities or by an immovable asset. In the first case, the loss coverage will be total after seven years (80% after six years). For a loan secured by real estate, an additional two-year period is granted as follows: 70% after six years, 80% after seven years, 85% after eight years, 100% after nine years.
Regarding the repurchase of NPL loans on secondary markets, the rules adopted are those recommended by the European Parliament, according to a European source. In particular, the provisioning of equity will not restart from zero after each sale of a non-performing loan. The buyer of a NPL will have to continue the provisioning already started.
With this "balanced" agreement, European legislators have made "an additional important step forward in the reduction of risks in the banking sector," welcomed Roberto Gualtieri (S&D, Italy), co-rapporteur for the Parliament. The other co-rapporteur, Esther de Lange (EPP, Netherlands), said that work needs to continue on the proposal for a directive introducing a European passport for NPL transactions on secondary markets "in order to address the legacy issue of the stock of non-performing loans, while ensuring a high level of consumer protection". (Original version in French by Mathieu Bion)