During and after the most recent financial crisis, non-performing loans (NPLs) have been building up on banks’ balance sheets in several Member States and have been threatening the viability of a number of banks. The most recent progress report of the Commission on the issue shows that the trend of falling NPL ratios is continuing and that the quality of banks’ loan portfolios has improved.
With the latest ratio at 4.4% in Q3 2017, banks are at the lowest level since Q4 2014. Nevertheless the volume of NPLs remains well above pre-crisis levels and the ratio varies significantly between Member States ranging from 0.7% (Luxembourg) to 46.7% (Greece). The Commission also notes that “slow progress in some Member States remain a source of concern”.
As a result of the latest figures and a Council mandate dating back to July 2017 the Commission came out with a number of measures in March this year to tackle the issue.
This package includes in particular:
- a regulation amending the Capital requirements regulation (the Regulation);
- a directive on credit servicers, credit purchasers and the recover of collateral (the Directive);
- technical guidance on setting up national Asset Management Companies (AMCs).
The regulation establishes common minimum levels of capital to cover losses caused by future NPLs. Should a bank not meet the applicable minimum level, the gap would be covered by own funds. These minimum coverage levels would act as a so-called statutory prudential back-stop for newly originated loans that would turn non-performing. The proposal for a directive also proposes a common definition of non-performing exposures aligned with the one applicable for supervisory reporting.
The directive provides for a mechanism for secured creditors to recover the value from loans where the borrower defaults. The act aims also at facilitating out-of-court collateral enforcement – a way to rapidly seize the collateral that underlies a loan by avoiding going to court. This mechanism is nevertheless exclusively limited to business loans where it is agreed from the start and excludes consumers loans.
The second major aim of the directive is to create a secondary market for NPLs by removing barriers to credit servicing and to transferring bank loans to third parties across the EU via a passporting scheme. It defines the activities of credit servicers, standardizes the authorization and supervisory processes and establishes EU wide conduct rules.
Finally the Commission gives technical guidance via a staff working document on how to set up national asset management companies. The latter is optional on the Member States.
By Antoine Kremer, ABBL & ALFI Head of European Affairs