On 20 March 2017, the European Central Bank (ECB) published final guidance to banks on non-performing loans (NPLs).  Although the NPL guidance is non-binding in nature, banks should be able to explain and substantiate any deviations on supervisory request. The guidance will also be taken into consideration in the SSM supervisory review and evaluation process and non-compliance may trigger supervisory measures.

The thrust of the guidance is that banks must develop, implement and maintain a strategy for dealing with NPLs, including setting “realistic but ambitious” NPL reduction targets, establishing separate NPL work-out teams and requiring regular valuations of collateral. The guidance also looks at the use of forbearance options (such as reducing the interest rate or extending the repayment date) and how to measure impairment and write-offs in line with international accounting standards.

NPLs cover all non-performing exposures (NPEs), as well as foreclosed assets and “watch-list” exposures and performing forborne exposures. We previously reported on the draft guidance when it was issued in September 2016.  The guidance is addressed to European credit institutions supervised directly under the single supervisory mechanism (SSM), including their international subsidiaries.  Because the ECB has applied principles of proportionality and materiality, chapters on NPL strategy, governance and operations will be more relevant for banks with high levels of NPLs.

The structure of the guidance follows the life cycle of NPL management and covers:

  • Supervisory expectations on NPL strategies.
  • NPL governance and operations.
  • Forbearance treatments.
  • NPL recognition.
  • Qualitative guidance on NPL provisioning and write-off
  • Collateral valuations

A set of FAQs on the NPL guidance has also been published, which explain some of the background to the guidance and next steps. A feedback statement and comparison document explain how the guidance has been amended since it was consulted on in September 2016