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Non-performing exposures

ECB revises supervisory expectations for prudential provisioning for new NPEs

ECB has decided to amend its supervisory expectations for prudential provisioning of new non-performing exposures (NPEs) specified in the “Addendum to the ECB Guidance to banks on non-performing loans” (hereafter referred to as “Addendum”). Decision was taken after considering the adoption of a new EU regulation which outlines Pillar 1 treatment for NPEs. The new regulation, which came into effect on 26 April 2019, is complementary to the existing prudential rules and requires a deduction from own funds when NPEs are not adequately covered by provisions or other adjustments.

The changes which were being made to the supervisory expectations disclosed in Addendum to enable treatment of NPEs more coherent are as follows:

  • NPEs resulting from the loans originated from 26 April 2019 onwards are subject to Pillar 1 treatment, with the ECB closely monitoring the risks from them.
  • There is an alignment of the relevant prudential provisioning time frames, the gradual path to full implementation and division of secured exposures, along with the treatment of NPEs guaranteed or insured by an official export credit agency, with the Pillar 1 treatment of NPEs listed new EU regulation.

At the start of ECB Banking Supervision, in November 2014, the volume of NPLs maintained by substantial institutions amounted to around €1 trillion. This had dropped by nearly half until the end of March 2019, to €587 billion (an NPL ratio of 3.7%).

Even after witnessing the latest progress, the ECB considers it of paramount importance that level of NPLs is further reduced, thereby resolving them in a rapid manner while the economic conditions are still promising.

Note: Pillar 1 refers to minimum capital that all banks are legally required to hold under the Capital Requirements Regulation.